Real Estate

How to successfully budget for a cottage (yes, you can do it!)

a hand putting a coin in a piggy bank on a blue background, budget Photo by Shutterstock/Billion Photos

So you’re thinking of dipping your toes into cottage ownership. But where to start? Is it the same as buying a house? What’s involved in a cottage mortgage? Are there other fees you need to consider? Don’t worry, as long as you budget appropriately, cottage ownership isn’t a mystery. We spoke with a handful of budgeting experts to outline everything you need to know to financially prepare for owning a cottage.

Figure out what kind of cottage you want

The first step in budgeting for a cottage is narrowing down the type of property you’re interested in. Are you looking for a waterfront cottage or a cabin in the woods? Do you want a four-season place or somewhere only accessible during the summer? What about location? Are you hoping to buy a three-bedroom cottage in the heart of Muskoka or something rustic north of Timmins?

All of these decisions will impact the price. Popular locations, such as Muskoka, will be more expensive. Waterfront will also hike the cost, especially if you’re looking for a sandy shoreline perfect for swimming with good sun exposure. And the more bedrooms and bathrooms, the higher the price tag.

Our experts say that you need to be realistic about what you can afford. You may have your heart set on a $1 million property in the Kawarthas, but does your income allow for that kind of cottage? Take the time to browse through listings or meet with a realtor. This will give you a better idea of what type of properties are available and how much they cost.

Budget for the cost of cottage ownership

If you’re having trouble figuring out how much you should spend on a cottage, our experts suggest looking at your cash flow. Subtract your expenses, including your phone bill, your mortgage payments, even your retirement savings, from your income. Whatever’s left is your cash flow. Do you have an extra $1,000 a month to pay off a $200,000 cottage mortgage?

You also need to factor in the other expenses that come with owning a cottage. As any cottager will tell you, they require constant upkeep and repairs. Plus, you have hydro bills and cottage association fees. Not to mention property taxes, which will go up as your property increases in value. These extra expenses can amount to several thousand dollars each year.

If you want to secure a mortgage for your dream cottage, you’ll need to show that you can afford these expenses.

Securing a mortgage

When you’re applying for a cottage mortgage, it’s all about your debt-to-income ratio, says Andrew Thake, a mortgage broker in Ottawa. This means that to be pre-approved for a mortgage, you need to prove that you pay off your debts on time and that you have enough income to cover future debts.

Lenders are looking for good credit scores, Thake says, somewhere around 680 or higher. “Even if you have $100,000 on your credit cards, that’s fine, as long as you’re paying them on time,” he says.

Savings, on the other hand, won’t do much to sway lenders into giving you a loan. You could have $1 million in your bank account, Thake says, but if you default on your credit card payments, the lender isn’t going to trust you to pay back your mortgage.

Thake adds that if you’re buying a three- or four-season cottage, it’s the same process as securing a mortgage on a house in the city— it requires a five to 10 per cent down payment. If, however, you’re looking at something more remote, like a cottage on an island or a property without running water and electricity, it can be harder to find lenders. When you do find a lender, the down payment will likely be closer to 20 per cent, plus higher interest rates. Take this into consideration when figuring out the type of property you want.

Consider your buying options

You’ve calculated your cash flow, and maybe it isn’t quite enough to cover a second mortgage, plus associated cottage expenses. Don’t fret, there are other options, our experts say. Rather than going in alone, you could split the purchase with a family member or a friend. The plus side of this is you’re only paying for half of everything. It makes cottage ownership much more affordable. The downside is that you’re now having to negotiate weekends and figure out how much each of you is willing to spend on necessary upgrades, like a new dock.

Another option is renting. If you’re the type who likes to travel abroad and you only plan to spend a few weeks at the cottage each year, renting a property could be a more affordable option. You don’t have to worry about mortgage payments or upkeep, and you still get to enjoy the lifestyle. The downside is that you don’t get to go whenever you want, you’re limited to what’s available for rent, and you aren’t making an investment in a property.

If you do have your heart set on buying a cottage, keep prices more affordable by purchasing during the off-season, our experts say. Sure, cottages don’t suddenly go on sale over the fall or winter, but demand does drop off. This means you’re less likely to be caught in a bidding war, and you have more leverage to negotiate conditions with the seller.

Plan for future expenses

Don’t pull the trigger on your cottage purchase too soon. You may have figured out your price range and the type of cottage you want, and maybe you’ve even spoken to a realtor and mortgage broker about your options. But before you buy, take a deep breath and think about the future. Owning a cottage may seem like a dream now, but will it always be?

If you’re a young couple, have you thought about adding kids to the equation? A 2015 report compiled by MoneySense found that raising a child to the age of 18 costs approximately $253,946. Our experts point out that the cost of daycare is often underestimated, ranging from $12,000 to $15,000 per year. And if your kid becomes involved in sports or other activities, are your cottage weekends suddenly replaced with soccer sidelines?

If kids aren’t an issue, another factor to consider is old age. Is the cottage you’re looking at on a hill with steep steps down to the water? How will you navigate that as you get older? If you plan to pass the cottage on to someone, there may be a land transfer tax that needs to be paid. Or if you decide to sell the cottage before you reach old age, you’ll have to factor in capital gains tax on the property’s accrued value. Considering current real estate trends, this could amount to thousands of dollars.

These concerns aren’t meant to scare you off buying a cottage, but they are worth thinking about. Cottage ownership is a rewarding experience, and there are professionals, such as financial planners, realtors, mortgage brokers, and estate lawyers, who can walk you through each detail of the ownership process. But to ensure you don’t get in over your head, plan out your budget before you buy.

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