Buying a cottage or cabin? Be prepared to consider mortgage alternatives

A cottage is pictured in this file photo. (Pixabay / Pexels)

OTTAWA — After the initial rush of Canadians who bought a second property to escape the city amid the pandemic, there are still plenty of would-be buyers looking to follow in their footsteps.

However, borrowing for a vacation property can differ from the typical home buying process, experts say, with more than your creditworthiness under consideration by the lenders.

A report released by Re/Max in May found that 59 per cent of those who plan to purchase a recreational property in the next year are first-time recreational property buyers.

And while the firm's 2021 recreational property report found prices are on the rise, it also said 22 per cent of those surveyed said lower interest rates have increased their ability to buy.

Donna Murphy, a mortgage agent with TGM The Mortgage Group, says it is important to work with people who are familiar with the ins and outs of cottage properties.

"Make sure who you're working with has your best interest and knows what you're looking for and what your short term and your long term goals are," Murphy said.

If you don't have the cash to buy a vacation property outright, you may be able to get a mortgage. Other options include refinancing your existing house to fund your purchase, or a combination of the two.

Generally, Murphy says, the more like a regular home a vacation property is, the easier it will be to obtain a mortgage, all other things being equal.

Things like accessibility, winterization and potable water are key things lenders will look for.

Toma Sojonky, a mortgage adviser in West Vancouver, B.C., says sometimes there is an advantage in refinancing your home over obtaining a mortgage directly on the vacation property.

"Some of these cottages and vacation properties have their sort of inherent nuances that will make it difficult or impossible to finance directly," he said.

"If you've got a house in the suburbs that's highly marketable and it conforms with property requirements for a lender and that's vetted by an appraiser. It's a much easier path in some instances."

The hot housing markets in many of Canada's biggest cities have also spilled over to the recreational market. Murphy says she's seen the rising prices push hopeful buyers to look at places that might be a longer drive from home, but are also a little more affordable.

Murphy said each situation is unique but she estimates that on average the mortgage stress test rule changes in June reduced the maximum mortgage amount borrowers can qualify for by about five per cent, an amount that could make a difference in a hot market.

If you don't qualify under the new stress test rules, there are options. Murphy says you could consider alternative lenders, but you should expect to have to pay more than you would with the banks.

"And so it's a very personal decision of how bad they want that cottage property or recreational property," she said.

This report by The Canadian Press was first published July 15, 2021.