How to buy a cottage
Lynne MacDonald, of Prince Albert, Sask., says buying her first
cottage property was surprisingly easy.
With her own home paid off, she used it as equity to obtain a loan
from her bank to buy the property. And because she took advantage
of a promotion at her bank, she didn't pay any legal or appraisal
She bought a lot near Candle Lake, Sask., a 45-minute
drive from home, which she describes as quiet, unpretentious and
laid back. "My friends are coming up here to retire -- it's
a home away from home," she says. "And in four years when
I retire, I'll be up here for the summers."
As easy as it seemed to MacDonald, she did her homework before
buying her cottage. Buying a recreational property is different
than buying a house in a few key respects, so if you want to end
up with as sweet a deal as MacDonald, here's what you need to think
Decide what you're looking for
Before Macdonald bought her piece of heaven, she thought about four
factors that you would do well to consider:
1. Travel time: How far are you willing to drive?
"Three hours seems to be an acceptable length for most people,"
says Mike Baum, a Realtor with Century 21 Cottage Country Realty
Inc. in Dorset, Ont.
2. Size of lake: Some retired couples want peace and quiet and
don't mind a mile-long lake with noise restrictions, whereas younger
couples might want 15 or 25 square miles and lots of boating freedom,
3. Access: Would you like to be on an island with no road or somewhere
on the mainland, where the road may be plowed year round or only
seasonal road? Decide before you start looking when and how often
you will visit.
4. Existing or vacant lot: Building your own home
away from home starts at about $150 a square foot. Baum says there
are loans and mortgages available that are tiered according to construction:
Once you reach a certain stage in the building process, the bank
then lends you more of the overall amount for which you were approved.
Financing options vary widely
Since the baby boomer demand for cottages is high today, banks have
created a range of flexible financing options.
According to Paul Mims, CIBC's vice-president of mortgages and
lending in Toronto, second mortgages are becoming passé.
"People like having to deal with one mortgage -- it's simpler."
And depending on where rates are at, the interest rate on a second
mortgage may be more than what you'd pay on a line of credit.
Mims adds that a second mortgage often includes many legal costs
and is stricter in terms of a repayment schedule than other options
worth considering. If possible, he says you should think about refinancing
the mortgage on your home.
For example, if you have a $300,000 home and owe $100,000, refinance
and put the two together into a $200,000 mortgage.
You might also take out a secured line of credit registered against
your home, which you can pay when you want and draw against it when
needed for any unforeseen circumstances, says Rod MacInnis, owner
of The Mortgage Centre in Halifax.
If you do opt for a second mortgage, GE Capital recently
introduced a 10-percent-down mortgage with baby boomers in mind
that rivals the typical 25- to 30-percent-down mortgage payment.
Its interest rate sits at prime, requires only minimum interest
payments and can be paid off as quickly or slowly as you like. To
qualify, the cottage must meet certain criteria, such as having
The taxman cometh
If you own a house and a cottage, only one of the properties is
considered tax-exempt when it comes time to sell. According to the
Canada Revenue Agency, only the abode considered your principal
residence is eligible for the exemption. But your principal residence
doesn't have to be your house.
"If the capital gain on your cottage is greater than the capital
gain on your residence, you can name that your principal residence,"
says Christine VanCauwenberghe, director of tax estate planning
for Investors Group in Ottawa.
If you make regular weekend trips to the cottage for a good chunk
of the year, that probably makes it a principal residence. Contact
the Canada Revenue Agency or an accountant advice on your specific
Tricky tax issues loom large again when you decide to leave your
cottage to your children. VanCauwenberghe doesn't recommend adding
children to the deed while the parents are alive.
When you transfer an asset to someone who is not a spouse, you
trigger a capital gain and must pay tax immediately even if you
haven't received any proceeds. And if a child has trouble with creditors
or an ex-spouse, there's a chance of losing the cottage in order
to pay off those debts.
Instead, VanCauwenberghe suggests making the cottage part of your
estate. There will still be tax to pay, but you can use renovation
costs to offset some taxes. When it comes time to sell or transfer
the property, you can figure all major renovations that you've kept
receipts for into its adjusted cost base, thereby decreasing your
A better option may be to buy life insurance to cover some of the
tax costs. Ask your children to help foot the bill for the premiums.
Or, if you can, liquefy some assets and put money aside for the
taxes that will come down the road.
There are more caveats to buying a cottage to think about. This
is not an exhaustive list, but here are some major considerations:
Talk to your insurance broker. These days,
you can no longer assume that every cottage is insurable, so be
sure to talk to your broker before you buy. Expect to fill out an
extensive questionnaire ensuring things like wood heating systems
are up to code.
Obtain a survey. Unlike major residential areas,
where lots are clearly defined, boundaries in cottage country tend
to be murkier. "The driveway may be coming onto someone else's
land, and all of sudden they put up a gate and you no longer have
access," says Baum. So be sure to get a title survey for the
property before you buy.
Look into environmental considerations. If
the cottage you're looking at will need an extension or a new septic
system, you'll need clearance from the environmental ministry of
the provincial or territorial environmental, and sometimes even
the local public health department. "They (the Ministry of
Natural Resources) are very restrictive," says Mitchell O'Grady,
assistant building official in Ontario's Algonquin Highlands. But
if you do enough research, you're bound to find loopholes. For example,
they may not like crib docks, which alter the shoreline, but they
may allow floating docks, as they won't change the shoreline habitat.
Check the age of the septic system. Sewage
systems are government regulated and must meet established standards.
Find out when it was last serviced and pumped out or you may be
facing a costly replacement. And wouldn't you rather spend that
money on a new jet ski rather than a new toilet?
Melanie Chambers is a writer in London, Ont.