How To Finance Your Cottage

By Joe Callaghan • Last Updated July 12 2022

At its best, a cottage is a refuge from the numbers. The digits that demand so much attention in our daily lives — the ones tick-tick-ticking along on your wrist until the next meeting, the little white one in the red dot corner of an app telling you there’s notifications still to be answered. These are all blissfully left on the other side of a cottage door. But before you get to the door, you must first make the numbers work.

What you need to know

  • You’re going to need help: Unless you’ve won the Lotto Max (and arguably even if you have) getting solid financial direction or even just insight will be invaluable. A lot of real estate experts recommend leaning on not just a financial advisor from your own bank but also a broker or financial professional from the municipality or area you’re cottage-hunting in. The local expert’s familiarity with quirks or issues native to the region that have worried lenders in the past will come in handy early and often.
  • Find your type: Canadian lenders don’t lump all cottages into the same bracket. They split them into Type A and B properties. Type A is an all-season, year-round property. In other words, a home. Type B on the other hand are seasonal properties, not winterized and possibly accessed with a seasonal road. The latter are often that little bit harder to finance and will likely require a higher down payment — sometimes as high as 35%.
  • Weigh up the options: The most common ways to finance a cottage are either through a mortgage, by using the equity in a primary property or a combination of these two. Input from the aforementioned financial advisors will help figure out which works best for you. If you’re buying a cottage as a first home, there are a range of first-time buyer programs (including borrowing from an RRSP) and credits that will help too.

What you need to add to your vocabulary: HELOC

If you’re lucky enough to have your eye on a cottage as a second home, your first property could well be the difference-maker in getting there.

A very common way of financing a cottage is to take out a home equity line of credit (or HELOC). You can refinance your existing home up to 80% of its value and with a HELOC you only have to pay down the interest (vs. a mortgage where you have to pay the principal too) so you’ll have some extra breathing room.

There are potential minuses too though, for instance a HELOC usually comes with a higher rate of interest than a mortgage but it’s definitely worth exploring if it’s an option for you.

What you (maybe) don’t know

  • A lot: There are so many quirks and kinks with buying a cottage compared to the relatively more seamless condo or urban home. Did you know that timeshares don’t qualify for any financing at all? Now you do. So again, having financial advice from people who know your situation and the area you’re hoping to buy in is so key.
  • Water can get choppy: It’s one of the primary reasons we want that little cabin — waking up feet from the lake’s edge. But it does complicate things. Waterfront properties make lenders antsy with erosion, flooding and insurance all factors. A higher down payment may help. Some lenders will ask for a potability/water quality test too so adding a financing condition to your offer is a good idea, giving you time to complete the tests.
  • Super-hosting won’t help: While you may factor potential AirBNB rental income into your number crunching, a lender won’t. Unlike a traditional rental property like a condo where lenders will add up to 75% of projected rent to bump your potential mortgage, a cottage doesn’t get the same vote of confidence. That doesn’t mean you can’t reap that AirBNB love once you’ve got the cottage, of course (assuming there are no local bylaws against that!).

What you shouldn’t forget

  • To pace yourself: The temptation may be to race right up to your dream lake and start shopping around. But getting the numbers in order is so important. It also makes you a more attractive bidder. Pre-approval makes you a qualified bidder, which is the best way to ensure the perfect cottage doesn’t slip through your grasp.

Ask the expert

Top three tips from Laura Stevens, a real estate agent who covers the Muskoka region 

Laura Stevens, Muskoka Realtor

Get a handle on what you can afford — right away: Everyone comes into the market thinking ‘I only want to spend this much’ but what you want to, need to and can spend are often different. With the market the way it is right now, it’s almost impossible to get anything at that level of what people want to spend. Expectations need to be flexible and knowing what you ultimately can spend is vital. And there’s no need for fear. Waterfront is a fixed commodity. We’re not creating any more. God is not putting any more out there for us. So the value is always going to trend up.

Broker over bank is often the way to go: With these properties, the best course of action can be to go with a mortgage broker. You used to only go to a broker if you had bad credit or couldn’t get money from a bank. Not now. Brokers have access to all of the different lenders and based on what you’re buying can come up with a good plan. But a bank can only offer what it is they institutionally offer. Scotiabank for example are very good with rural lending. Other big banks have their policy and if you don’t fit in the box then sorry, out you go.

Don’t rush to online mortgage calculators: Again this is about expectations but most mortgage calculators you find online are based on residential mortgages, not cottage or second homes. Depending on your cottage property, most lenders are going to want 20% down. If someone comes in and tells me they can spend $800,000 because they did an online calculator buy they only have $40,000 to put down, that’s not going to work.