I was driving along the water this weekend from Wasaga Beach to a showing in Meaford thinking about ideas for my blog. I thought I’d cover what was in the news lately about the impending “rate wars” between the banks, or even an economist’s prediction that housing prices will be stagnant for the next 10 years (That must be some crystal ball!!?). With the warm weather around the corner and the summer spring/summer buying season upon us, I thought I’d write about one of the most common “deal breakers” I encounter - Financing on a recreational property or second home.
There is a difference between the two types of property. A vacation property is for recreational use i.e. cottage, chalet, condo etc., while a second home is typically somewhere to stay for long commuters, university residence for children etc. In both cases, lenders assume buyers will either use it themselves, or used rent-free by family members. If the property is not used to derive rental income, lenders tend to treat both types the same, so we’ll just call them second homes. If it is an income property, lenders will apply a whole different set of rules, I’ll speak to that later.
2nd Home financing is considered a riskier transaction than a standard mortgage on the primary residence. The thinking is that if the owner can’t pay the bills, they will preserve their primary residence making the 2nd home more vulnerable to default. Not a hard and fast rule, but lenders often cap the loan value at around $700,000. Limits and lending policies on 2nd homes are closely tied to location, loan-to-value and the condition/characteristics of the properties themselves.
2nd homes vary from luxurious to rustic, and lender differentiates between those that are marketed for primary use and those that are more seasonal. These groups are referred to as Type A and Type B.
Type A properties are considered “prime” as they can be sold as 1st or 2nd homes and borrower can typically finance up to 95% of the purchase price and take advantage of the longest amortization period. Type B are a little less marketable as they lend to have limited access in the winter and are left unattended for long periods of time. As they are a little riskier to lenders, they tend to offer financing to a max of 90% depending on the condition, and amortization periods tend to be shorter.
If your cottage is a little TOO rustic to qualify for either, don’t worry! If your credit is good you can refinance your primary residence and use the equity to buy the 2nd home outright, or make a large down payment to get a lender to the plate.
Another popular form of ownership in this area is resort condos; where a unit is purchased and either rented out most of the time privately or placed in a rental pool run by the association or resort in order to offset the cost of ownership and used by the owner on a limited basis if they wish. These are typically difficult to finance in a traditional method and most are purchased on a line of credit.
The advice I give to all of my buyers before we start the process is to sort out the financing ahead of time so you know what to look for and avoid a surprise when we find the perfect property. Using a local mortgage broker is wise; they know the area and their lenders are usually easier to deal with if something is a little different. There are also standard banks in the area that offer financing for 2nd homes as they are aware of local conditions. Just give me a call and I’ll put you in touch. South Georgian Bay is a lot of fun in the summer, hope to see you soon!