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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 fees.

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 about:

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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, says Baum.

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 year-round access.

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 situation.

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 capital gain.

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.

Special considerations
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.

-- Posted: Aug. 6, 2004
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