Since the health crisis, many are thinking of investing in cottages. But they still need to be able to finance this real estate project!
In Canada as in Quebec, when you want to buy a property, you will have to bring a down payment for your house. The amount of this down payment varies according to the price of your cottage and your profile.
Minimum down payment Buy Cottage
Generally, in Canada, the acquisition of a property requires a contribution of at least 5% for the down payment. However, for cottages it is a different reality. Given that the investment in cottages is often made with a view to owning a second home, therefore for a down payment on a second home the amount is a minimum of 5%.
Chalet financed to the staff
You can finance the purchase of your cottage on a personal basis, that is, you can qualify only on the basis of your personal income. This way, lenders will not take into account the income that comes from your cottages.
However, if you have a bad credit history, there are ways to get your mortgage with bad credit .
This is the most suitable financing if you are thinking of buying one or two cottages as a second home.
In order to qualify, you must not be over-indebted as the new mortgage will impact your credit report by increasing your personal debt ratio.
The down payment for the purchase of a rental cottage is 20%.
Commercially financed cottage
You can also opt for a commercial mortgage to finance the purchase of your cottage if your goal is to rent it out on a short-term basis (Airbnb…).
The advantage of this financing is that your personal income is not a major factor in qualifying. In addition, your personal debt ratio will not be impacted by the commercial mortgage. Your name will not appear on the commercial mortgage either.
It is an alternative for you to acquire one or more cottages in these conditions.
The disadvantage of this type of financing is the down payment. Indeed, if you choose a commercial mortgage, you must bring a down payment of 35% to 50%. The elements that will vary the amount of the down payment are the quality of your loan application and the profitability of your rental cottage.
Buying a cottage without a down payment?
In Canada, for any purchase of a property, a down payment is required. So, the best thing to do is to save as soon as possible and watch your expenses if you are thinking of buying a home.
However, it is always possible to finance your down payment with a family donation or a collateral guarantee. Solutions that we present to you below on this page.
Evaluate your financial situation before you start looking
Before you start looking for a cottage, we invite you to evaluate your financial situation.
Keep in mind that a cottage involves many expenses before and during the purchase. It is therefore necessary to list your needs, anticipate the costs associated with the purchase, establish your financial capacity, plan for a sufficient down payment as well as verify the land, the sanitary installation (septic installation to standards), the water supply of the cottage (a well is an acceptable source, subject to testing confirming that the water is potable)
Financing the down payment for the cottage
Here are 6 solutions to finance your cottage down payment.
Use your line of credit
You can opt for a mortgage line of credit to finance the down payment on your cottage. This type of financing allows you to finance up to 65% of the value of the down payment for your mortgage.
A line of credit is a component of a fixed term mortgage. This means that you do not have a fixed amount to pay back and the lender only requires interest payments.
Make a traditional loan
You can also opt for a traditional loan from a bank. Depending on the type of cottage, you can take out a mortgage for up to 95% of the down payment.
This loan may be accompanied by mortgage insurance to protect your lender from any default on your part.
In some cases, in addition to your mortgage, you may be able to obtain a renovation loan to do work on your cottage.
Use the HBP or the TFSAPP
Don’t hesitate to take out a loan RSP to access HBP or use TFSAPP to finance the down payment on your cottage.
Collateral security
In order to help you finance your down payment, a family member can collaterally guarantee his or her home with a bank. The bank will lend you the full amount of the down payment and register your debt with the notary as well as the collateral security for your family member’s home.
Use your RSP
You can finance your cottage by using the funds available in your account RSP. You can withdraw up to 35,000 CAD to finance the purchase of your cottage. If you choose this option, make sure you can repay the amount withdrawn within 15 years.
Family Donation
It is also possible to ask a family member to make a donation to finance the down payment on your cottage.
How to finance the purchase of a cottage?
We offer 4 solutions to finance the purchase of your cottage.
Taking out a mortgage
It is possible to take out a mortgage of up to 95% of the value of the cottage depending on whether you use it as your primary or secondary residence. You can choose whether you want to take out this loan with a fixed, variable or reduced rate. The amortization period is usually 25 years.
You can also obtain a mortgage on your land to build your cottage.
You will have to take into account the cost of providing mortgage insurance.
Refinance one of your properties
Another way to finance your cottage is to use your primary residence as leverage to refinance the mortgage on your property. If your home is valued at a higher amount than your current mortgage, then you will be able to use the accumulated equity to borrow up to 80% of the value of the cottage.
Buying with several people
Buying a cottage can also be a group project. By buying a cottage together, you will have an easier time taking out a mortgage and sharing the risks and responsibilities.
Make a lease-purchase
You can also turn to a lease-purchase. The advantage of this mechanism is that the down payment is low, namely 10 to 15% of the value of the cottage. Thus, the lease-purchase allows you, via a notarized agreement, to rent your cottage before becoming the owner at the end of the lease.
Do not hesitate to contact us for any advice or additional information.
