Private Mortgage for Cottage
It is the dream of many Canadians to own their very own cottage or seasonal home. Maybe you have fond memories of your childhood going to a friend or family member’s cottage and you’d like to create those memories for your own children. Or perhaps you are fishing or snowmobiling enthusiast and you’ve always dreamed of having your own private retreat – and you are finally at a point in your life where you can make that dream a reality.
Purchasing a cottage can be very rewarding. But purchasing a cottage can also significantly add to your debt load (or your debt to income ratio) – particularly if you still have a mortgage on your primary residence. Because of this, you may find it difficult getting a mortgage for your cottage with a traditional lender.
Fortunately, as with other types of properties, you can often circumvent this problem by getting your cottage mortgage with a private lender. In fact, in order to make their dream of owning a cottage come true, Canadians often opt for a private mortgage when they are purchasing a cottage.
Private mortgages generally have somewhat higher interest rates than traditional mortgages but depending on your circumstances, they may still be worth it. Getting a private mortgage for your cottage has a number of advantages, however it is important to understand that cottage mortgages do work a little differently. This is because there are different types of cottages.
Some people have cottages that can be lived in year-round. These cottages are really just like second homes – maybe they are even of thinking of making their cottage their primary residence after they retire.
Other cottages are really vacation homes only. They are not winterized and are really only livable at certain times during the year.
Finally, cottages can further be divided into dwellings that are used primarily for family getaways and dwellings that are rented out in order to generate income for the owners. All of these things are considerations for a lender when they are determining whether or not to approve you for a mortgage.
Will Your Cottage be Owner Occupied, or is this an Investment Property?
This question matters, because it will affect how much of a down payment that most lenders will require.
For Owner-Occupied – you will generally need at least a 5% down payment for a property worth $500,000 or less, a 10% down payment for a property worth between $500,000 and $999,999, and a 20% down payment for a property worth more than $1 million.
For Investment Property – you will generally need at least a 20% down payment regardless of the value of the property.
Two Types of Cottage
When you apply for a private mortgage for your cottage, the lender will want to know what type of cottage it is. For their purposes, there are two types of cottages.
Type A – All Season Cottages
These cottages are essentially secondary homes. They are fully winterized so that they may be lived in year-round. To qualify as a Type A Cottage, the property must:
Be one unit only.
Be owner-occupied – or occupied by an immediate family member of the owner.
If it is a new construction, the cottage must be covered by a Home Warranty Program that is approved by the lender.
Must be marketable and have re-sale demand as a residential dwelling.
Remaining economic life of the property must be at least 25 years.
Type B Cottages – Seasonal Cottages
These properties do not need to be winterized.
Special note on waterfront cottages – If the cottage that you are looking to get a mortgage for, is located on a lake or other waterfront, the lender will generally ask that the water be tested to ensure that it is safe or filtered. If the water is determined not to be safe, you will likely have to install a filtration system before the full funds from the mortgage will be granted.
What are interest rates like on mortgages for cottages?
We have good news for you! The interest rate for mortgages on cottages is generally the same as the rate you would pay for the mortgage on your primary residence. The one exception to this would be if the cottage is to be used exclusively as a rental property – in this case, the interest rate may be a little higher.
Why would I choose a private mortgage for my cottage?
Good question! As mentioned, there are several advantages to getting a private mortgage for your cottage including the following:
Easier to qualify for – Purchasing a cottage through financing is going to raise your debt to income level (this is particularly true if you still have a mortgage on your current home). Because of this, you may find it difficult getting a mortgage for your cottage with a traditional lender. Private lenders however, can look at a much larger range of qualification criteria so it is often easier to get approved with a private lender.
May still qualify even with a poor credit history – Having bad credit doesn’t necessarily mean that you don’t pay your bills – but traditional lenders often are prevented from looking beyond a simple credit score. Private lenders can look at the bigger picture to determine whether to approve a borrower – even if that borrower doesn’t have perfect credit.
Fast approval – the housing market – including the cottage market – is extremely competitive. The last thing you want is for the cottage of your dreams to be snatched out from under you because you were still waiting for approval. Private lenders have the ability to act quickly so that you can get a fast approval
Flexible terms and amortization periods – Traditional lenders generally have various terms and amortization periods that are standard within the industry. But if you are looking for a term or amortization period that is non-standard, private lenders generally more flexibility to offer you what you are looking for.
Non-traditional properties –Is the cottage you want to buy a non-traditional property like a tiny home or a treehouse? If so, you will likely have trouble getting a mortgage through a traditional lender. But a private lender may be willing to help you out!
How do I get a private mortgage for my cottage?
The process for getting a private mortgage for your cottage is much like getting any other type of mortgage. It usually starts with a consultation with your mortgage broker.
Your broker will review your financial situation, and give you an idea of how much of a mortgage you can afford – this is known as a pre-qualification.
You will then be required to gather a number of financial documents and statements (don’t worry – your broker will give you a checklist of what you need). Once this is gathered, your broker will work with private lenders in their network to get you pre-approved for a mortgage.
When you are ready to make an offer on a cottage, the lender will likely require additional details such as the value, and location of the property, etc.
Why should I work with a mortgage broker to get a private mortgage for a cottage?
While it is possible to engage directly with a private lender to get a mortgage for your cottage, your best bet is to sit down with a mortgage broker who can help you.
It does not cost you anything to work with a mortgage broker, and in fact you will probably save money on your mortgage. This is because mortgage brokers work with a large number of lenders and are able to compare rates for you on your behalf. This helps to ensure that you get the best possible interest rate on your cottage mortgage.
Furthermore, mortgage brokers even work with some lenders that can ONLY be accessed through a mortgage broker.
Working with a mortgage broker also saves you time, because it would be a lot of work for an individual to compare mortgage rates on their own. And really, it’s not a good idea to do that anyway since each lender you spoke with would want to do a credit check (Multiple credit checks in a short timeframe will lower your credit score.).
A mortgage broker only needs to run one credit check and that one credit check can be used for every lender that they get rates from.
Finally, when you work with a mortgage broker, it is like having a coach or teacher on your side who is able to answer all of your questions about the mortgage and even help you with the paperwork. Purchasing a cottage is a large expense, and your mortgage broker is there to ensure that the payment plan you work out with your lender will be one that is manageable.
Contact us today!
If you are considering purchasing a cottage and would like a private mortgage to make this possible, we can help. Contact us today to speak with a member of our team and get started!