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Cottage financing: An entirely different kettle of fish

Susan Smith

National Post
May 31, 2014

No furnace? No foundation? When it comes to buying a cottage, that could mean no financing.

City dwellers are beginning to think of ducks and docks as a respite from concrete and congestion. But unless you have the cash on hand, it’s important to understand mortgage options before you start looking for your slice of paradise.

“We like to make sure clients are fully educated so they’re not wasting their time,” says Jeremy Ridley, a Barrie, Ont.-based senior residential mortgage specialist at RBC Royal Bank. “Also that they don’t fall in love with a property that can’t be mortgaged within their means.” Preapproval is especially important, he adds, because of huge variances in location and the types of properties that are available.

RBC divides the cottage world into two categories that define financing options. “Vacation A” properties are those with permanent foundations (installed below the frost line), year-round access, a permanent heat source and potable water, whether it be from municipal services, a well or treated lake water. These properties are zoned residential and are for personal use.

“Basically, what insurers and banks want to know is that that house can sustain itself if no one is around for weeks or months at a time,” Mr. Ridley says. “In the winter, you can leave the water on and set the heat at 15 degrees. Also, because it has a permanent foundation, you’re not going to have every animal and the dog going to live under the house.” Maintained roads are also important so the property can be accessed year-round.

Qualifying for a Vacation A is similar to qualifying for a principle residence, he says. This is true even though CMHC, which provides mortgage default insurance for home buyers who put down less than 20%, no longer insures second homes. Buyers won’t notice the difference for Vacation A properties because the two big private mortgage insurers — Genworth Canada and Canada Guaranty — continue to provide the insurance.
Instead of using CMHC for approvals, Mr. Ridley says, “we’ll toggle over to the other two, so I think it’s going to be business as usual.”

But cottage hunters who want more of a wilderness experience will likely find it harder to find financing through a bank. RBC calls them “Vacation B” properties, those with wood stoves or fireplaces, sitting on blocks or piers, having only seasonal access, or no potable water source.

For Vacation Bs, amortization is capped at 25 years and the bank requires a down payment of at least 35% in order to avoid the added cost of mortgage insurance. Genworth will provide mortgage insurance for these types of properties with at least 10% down. Canada Guaranty, however, does not have the Vacation B program.

“Vacation B properties are not a sought-after thing for banks to mortgage,” Mr. Ridley says.
This is good news for alternative lender professionals such as Matthew Robinson, a mortgage expert with roots in the Land O’ Lakes region northeast of Toronto.

His father, Wayne, started Pillar Financial Services 30 years ago after a business partner couldn’t get a mortgage to buy a house because it was considered a rural property. “He had a good job but just because the house wasn’t on a sewer system he didn’t qualify,” says Matthew Robinson, now executive vice-president of Pillar, which administers Frontenac Mortgage Investment Corp., a $150-million portfolio of private mortgage capital.

Things have changed in the past 30 years, of course, but the fact remains that Schedule 1 banks are still more rule-bound and less flexible, meaning there is room for companies such as Pillar to fill the gap.
Cottages off the beaten path or in less-than-prime condition don’t bother Mr. Robinson. A borrower’s self-employment or blemished credit record is also something the company can be more flexible with.

“At the end of the day, it’s all about evaluating the risk,” he says. “If you tell us why you didn’t qualify and we’re comfortable with it, [we] can price it, at a higher rate.” Or a buyer might be asked to put more money down.

If you have good credit, but a property doesn’t fit in the comfort zone of the banks, a mortgage loan through Pillar might cost 6% to 7%. If you have credit problems, it may cost you 10%. Construction loans, an area where Pillar also specializes, are in the neighbourhood of 12%.
Looking at the view from his Sharbot Lake office about an hour north of Kingston, Mr. Robinson notes that lakefront lots that went for $20,000 to $30,000 when he started in the business years ago are now selling for $150,000. But the region is still considered a relatively affordable place to buy a cottage.
Land O’ Lakes — there are about 5,000 of them stretching north and east of Kingston — is becoming more popular as an alternative to Muskoka.

“You can still get a basic cottage here for $250,000,” Mr. Robinson says. “The average is about $300,000, and $500,000 will get you something spectacular. If you were on Lake Joseph [in the Muskokas] you wouldn’t even get a lot for that.”

Some people, he adds, “still want to have that creaky door instead of a monster home. Just a cottage. A place to go fishing with the kids.”

Posted on Saturday, May 31, 2014 at 03:05PM by Registered CommenterElaine in | CommentsPost a Comment | References1 Reference

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