Is a vacation property your next purchase?
If you’ve ever dreamed of owning a cabin – summer weekends on the dock and the call of loons in the air – you’re not alone. Spending time at a cabin is a top priority for Canadians—a recent survey found that 68 per cent of those polled would opt for a long weekend at the cabin over a big-city getaway. And who can blame them? With the lure of nature and relaxation, it’s easy to see the appeal of a rustic second abode. But owning a vacation property is a significant financial commitment. That’s why we asked our very own expert, Jason Provencher, Manager of Business Development to give us the 411 on financing a second property.
“The first thing to consider is why you’re buying the property in the first place,” advises Jason. Echoing this sentiment is a Financial Post article that suggests asking yourself these three questions before diving into such a large purchase: “Is a vacation property affordable without stretching yourself too thin and sacrificing other financial goals? Is diverting money otherwise spent on vacations to a fixed address a good trade-off? And finally, where do you and your family want to be – sitting on the dock this summer or baking on a beach next winter?”
“If you’ve determined that owning a vacation property is the right decision for you,” Jason adds, “If you’re looking for a place to relax on the weekends, financing the purchase through a line of credit against your primary home might be the easiest way to borrow.” An added bonus? You’ll often get a better rate this way. But this solution isn’t right for every scenario. Jason explains, “If you plan to eventually rent the place out, separate financing is best for tax implications. And don’t forget that any income generated on your rental property must be claimed as income on your taxes.”
Let’s say you opt for separate financing to keep your options open. What do you need to know to get the best outcome? First and foremost, speak to your mortgage broker for the best possible rate and to find out how much you can afford. Brokers have access to multiple lenders and will make sure to get you set up with the right one. Jason has some additional recommendations:
- When lenders are deciding if you and your property are credit worthy, they’ll look closely at the property:
- Is it accessible year-round or is it deep in the bush? Some lenders have restrictions around this, and you’ll want to have this discussion up-front. Be sure to clarify if the property is on leased land or if it has restricted access.
- Can emergency vehicles get there should something happen?
- Is it near a lake or the mountains? An attractive setting makes it easier to sell in the future.
- What kind of amenities does it have? Sewer systems, running water, and electricity make your property more appealing.
- Regulation changes have made it near impossible to purchase a second home without a 20 per cent down payment. To highlight an example in that above-mentioned Financial Post article, that’s $40,000 on a $200,000 cabin, which could equal payments of $10,000 per year (assuming a four per cent rate and a 25-year amortization). Add to this, costs for property taxes, insurance, utilities and maintenance, including unexpected repairs, and your property could cost you $15,000 per year. If that’s just outside of your reach, consider using an existing line of credit or one secured against your primary home. If it’s a lot outside your reach, you might want to reconsider the purchase, and opt for renting a cabin instead or booking one-off vacations as budget permits.
- If you (or whoever you leave the property to) plan to sell the cabin and it turns a profit, you’ll need to consider capital gains taxes. Be sure to talk with a tax specialist about what this could mean for you.
Between choosing the ideal location, the perfect cabin, and getting your financial ducks in a row, property ownership isn’t something to jump into with your eyes closed. Before you make any decisions, speak with your mortgage broker to see if cabin ownership realistically fits into your financial plans. If so, with the right guidance, you could be on your way to enjoying your own piece of paradise.
Contact us today to talk about how Bridgewater Bank can help with vacation property financing!