With the rise of remote work, an increasing number of individuals yearn for the tranquillity of cottage living, seeking an idyllic retreat from the fast-paced urban lifestyle. Cottage ownership is becoming an attractive investment opportunity, given the growing demand for vacation rentals, offering cottage owners potential rental income. But buying a cottage in Canada involves securing the right financing.

Qualifying for a Mortgage for a Cottage in Canada

Qualifying for a cottage mortgage involves thoroughly evaluating your financial health and stability. A lender will look at several factors when assessing your eligibility.

Stable Income

When buying a cottage in Canada, lenders want assurance that you have stable, verifiable, and sufficient earnings to repay the mortgage. Regular income from a full-time job is ideal, but income from part-time work, a second job, or other sources (like rental property or freelance work) may also be considered. Lenders will look at your income history, the stability of your income source, and your future income prospects. If you’re considering changing jobs, waiting until you’ve secured your mortgage might be best. If you’re self-employed, lenders usually want to see at least two years of steady income, so ensure your financial documentation is thorough and up-to-date.

Credit Score

Your credit history gives lenders insight into your financial habits, particularly how you reliably pay your bills. They will evaluate your creditworthiness based on your past credit behaviour. Pay all your bills on time, reduce your credit card balances, and avoid opening new credit accounts leading to your mortgage application. Regularly check your credit report and correct any errors that could lower your score.

Down Payment

The down payment is the upfront amount you pay to purchase the property. The larger the down payment, the less you need to borrow, which reduces the lender’s risk. The minimum down payment in Canada ranges from five to 20 per cent. Showing that you’ve saved enough downpayment indicates to lenders that you have financial discipline. A good strategy might be to set up an automatic monthly transfer from your checking account to a dedicated savings account. Note that if your down payment is less than 20 per cent, you must typically pay mortgage insurance. This protects the lender in case of default but also adds to the mortgage cost.

Property as Collateral

The property must be sufficient as collateral for the loan. Lenders consider the property’s location, condition, and market value. An official appraisal will usually be required to determine the property’s value. When it comes to financing a cottage in Canada, factors such as year-round accessibility and amenities (like insulation, heating and water) can influence a lender’s decision.

Classifications of Cottages in Canada: ‘Type A’ and ‘Type B’

The Type A and Type B classifications enable lenders to set appropriate mortgage terms, down payment requirements, and interest rates that reflect the differing levels of risk. In the past, many cottages in Canada were intended for seasonal use. They were often built in remote, scenic areas, ideal for summer escapes but not designed for year-round living. Such properties, called Type B cottages, were often rustic, lacking modern amenities, and may not have been easily accessible year-round. However, as roads improved and construction methods advanced, more and more cottages were built or upgraded to be suitable for use throughout the year. Known as Type A cottages, they are considered similar to a traditional home in a suburban or urban setting. They generally have running water, sewage or septic systems, and heating. They can be used comfortably in any season.

A Type A property can often be financed with terms like a regular mortgage, so a buyer can secure financing with a lower down payment (as low as five per cent in some cases) and benefit from competitive mortgage rates. However, if a Type A cottage is not the borrower’s primary residence, lenders could see it as a slightly higher risk because borrowers are generally more likely to keep up payments on their primary residence than on a second home. This could result in an interest rate that’s 0.10-0.20 per cent higher than a regular mortgage on a primary residence. It’s possible to have an amortization period of up to 25 years, like a traditional mortgage. This results in lower monthly payments but more interest paid over the life of the loan.

When financing a Type B cottage, lenders might see it as a riskier proposition due to its seasonal use and potentially difficult access. Therefore, they may require a larger down payment (up to 35 per cent in some cases) and charge a higher interest rate. Lenders often set a maximum loan amount for Type B cottages, usually capped at $350,000. This is set primarily because the property might be harder to sell or lose value more quickly than a more ‘standard’ property, particularly in an economic downturn.

Regardless of the type of cottage you’re considering, it’s important to engage with a real estate agent who understands the nuances of cottage financing and the complexities of securing a mortgage. RE/MAX Canada is a leader in real estate with a strong track record in helping clients find and secure their dream cottages.