THE COUNTRY BECKONS: FINANCING COTTAGES, WATERFRONT HOMES, & VACANT LAND
Nancy Benson
Real Estate Advisor in Ottawa, Canada. Specializing in Unique Homes - Downtown, Condominiums, Custom Homes, Investment Properties, and Land Developments ???
COVID-19 is driving some curious real estate trends for sure. With many of us working from home the view on where to live has changed for sure:
- Purchasers are less concerned about purchasing something near their workplace and are looking further afield.
- Given the current restrictions on travel, everyone seems to want to buy a cottage these days.
GOOD NEWS: arranging a mortgage on a cottage or vacant land / new construction is not too different from buying your principal residence, with just a few extra requirements from lenders.
MORE GOOD NEWS: if you have considerable equity in your home, you can use some of that toward a down payment or to purchase the property outright, to start enjoying that cottage sooner rather than later. Depending how much equity you have many lenders will allow you to borrow up to 80% of the value of your residence to finance a cottage.
GETTING A LOAN for vacant land or new construction is more complicated. Lenders prefer to deal with a property that is already built rather than taking a risk on vacant land, so you will face more challenges and questions from your lender.
FOR ANSWERS to common questions, we chatted with Dan Faubert, a veteran mortgage broker with Ottawa-Carleton Mortgage. Dan has helped many of my clients obtain city properties, and he often helps clients with second homes.
For starters, he says, you should know your cottage categories. Lenders divide cottages into two categories:
? Type A and Type B.
Type A Property
Minimum 5 % Down Payment
A “Type A” property is one you can use year-round, with the same comforts of your city home. It has potable running water, a permanent source of heating and is built on a permanent foundation below the frost line.
As with a home in the city, if you have a down payment of less than 20 %, you are required to add mortgage insurance.
With a second property, however, even if you have a down payment of 20 % or more, Dan says most national lenders will still require adding mortgage insurance to give you a loan. With that insurance premium in place, Dan says you can then get the same interest rate they would offer you on your city home.
Dan works regularly with Genworth Canada, the country’s largest private residential mortgage insurer.
For a Type A property, Dan says the Genworth insurance premium would be 1.70 % of the amount borrowed with a mortgage at 75% of the property value. The premium is added to the mortgage amount.
Example: With a $100,000 down payment on a $400,000 property, an insurance premium of $5,100 would be added to your $300,000 mortgage and blended into your mortgage payments.
Type B Property
Minimum 10 % Down Payment
A “Type B” cottage is a more rustic property that is not winterized for all-season access. It lacks a permanent foundation and is constructed on a floating foundation such as concrete pilings.