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%.  The cost of the appraisal, the survey and the legal fees will all be more expensive because  of the location and distance to the cottage.

You would be far better to use "off-site" security.  Off-site security means mortgaging something local, rather than the cottage itself.  This may be your residence or an investment property.  Suppose you have a home that has no mortgage, refinance it to get the money to buy the cottage.  Interest rates on a home mortgage start at less than 6%.  If your house already has a small mortgage on it, you can obtain second mortgage financing at rates as low as 6.25% (through what is called a "secured" Line of Credit), whereby the payment is usually "interest only".  On a $50,000 loan, the minimum payment would be $260 per month.   You would keep up these minimum payments until you can afford more, or until the first mortgage is liquidated. Lending institutions are bending over backwards today to attract this type of financing.  Some of these institutions are paying legal fees, and appraisal fees to get your business.  Most "secured" Lines of Credit can be  negotiated at "Prime" lending rate, which is 6.25% today.   Also most of these loans a open for full or partial repayment without penalty.

If you already have a large mortgage on your house, you may ask the Vendor of the cottage to finance you, meaning you would ideally offer the Vendor close to his/her asking price and within the body of the offer, simply tell the Vendor that you are going to buy if, and only if, he/she will lend you the money required to buy.  In other words, if the Vendor is 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 he/she had no mortgage on the cottage, he/she may agree to accept your offer.  Certainly 7% return of the mortgage beats 3% he/she would be making by banking the money. You may also use an "unsecured " Line of Credit to purchase the cottage, however, this type of loan usually requires a payment equivalent to 3% of the balance outstanding every month.  Had you paid $50,000 for the cottage, the payment would be $1500 per month.

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.  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!