Spring time brings with it the compelling call of cottage country. As the weather heats up, so does the dream of waking up in the morning beside your favourite lake. You have no doubt imagined sliding open the patio door to the deck, stepping out with your early morning cup of java and let the wind gently blow the cobwebs off your face. If this is your fancy, there are some financing rules coming up that will save you heartache and money.

Don't mortgage the cottage!

Lending institutions as a rule do not like to mortgage something that may take a long time to sell. Let's face it, trying to unload a cottage in the fall or winter is, in most cases, an exercise in futility. So if you go to the Bank to get cottage financing, the banker may sell you what is termed "collateral" mortgaging. This type of financing is a glorified personal loan at a much higher rate. The going rate today is 8.5%.

You would be far better to use "off-site" security. Suppose you have a home that has no mortgage. Refinance your house to get the money to buy the cottage. Interest rates on a home mortgage start at less than 4%. If your house already has a small mortgage on it, you can obtain second mortgage financing at rates as low as 4.75%, or you can ask your existing banker to increase your existing mortgage by enough to buy the cottage outright. If you already have a large mortgage on your house, you may ask the Vendor of the cottage to finance you.

To properly explain the system, let us suppose I am selling my cottage and you are interested in buying. You would ideally offer me close to my asking price and within the body of the offer, simply tell me that you are going to buy if I (the Vendor) will lend you the money required to buy. In other words, if I am selling the cottage for $50,000, you are willing to buy it for $350.00 per month (that's $50,000 at 7% over 25 years). If I had no mortgage on the cottage, I may agree to accept your offer. Certainly 7% return of the mortgage I lend you beats 3% I would be making if I had insisted on cash and put the money in the bank earning interest. You have managed to buy the cottage without hassle, and without a down payment. You may put down some money if you wish, that would certainly help the Vendor realize that you are willing to invest in the plan.

You may also use lines of credit to purchase the cottage outright. The only thing wrong with using this type of financing is that usually the repayment on these lines of credit are 3% of the balance outstanding every month. Had you paid %50,000 for the cottage, the payment would be

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$1500 per month. You can get interest only lines of credit, but usually, these are secured by real estate or some other tangible asset.

If you must use the cottage for financing, you will need at least 25% of the purchase price as a down payment. The balance can be financed on a collateral mortgage. You must shop around to find the best rate with the least down payment or seek your financing through a mortgage broker. The rate of interest will most certainly be higher, as well as the building location survey, the appraisal of the property, the legal costs, the well and septic certificates.

Building Location Survey:

In town, a survey will cost $850, if you don't already have one. In the country, this same survey could cost you upwards of $1500 because of the time to get to the location and lack of starting reference points for the surveyor to start his/her job. The survey will show that the cottage is well within its lot lines, and the neighbours are not encroaching on your land.

The Appraisal:

In town, the normal evaluation appraisal will cost about $175. In the country, you can easily double that figure. The appraisal is necessary if you are going to mortgage the cottage. The function of the appraiser is to let your financier (bank or trust company) know that the subject property is indeed worth the money you are paying.

The Legal Costs:

Your lawyer, who must register this mortgage for the bank, will probably be seeking help in the area where you are buying the cottage since he/she may not be familiar with that township. Any extra help, or time cost money, which will be passed on to you.

Well and Septic Certificates:

In the city, these are not usually required. In the country, the lender will ask the lawyer to provide assurance that the well has, at the very least, good water. They may also ask for a pressure test of so many gallons per minute. The Bank will also insist on getting a look at the septic certificate when it was installed. Did it meet the township's requirements? Are there any outstanding work orders against it? All these things cost money.

If you can finance your cottage without using the cottage as security for the loan, you will be saving time and money. Seek the advice of those who know, prior to putting in your offer!