Everyone can relate to the lure of a cottage –lounging in a Muskoka chair while relaxing by the lake. However, buying a cottage is a major financial commitment that requires proper consideration.
When it comes to buying a cottage, the purchase price is only the initial financial aspect. Another serious financial commitment comes from the carrying costs, as well as the pieces of your long-term financial plan that are affected by the decision.
As you wrestle with this decision, take the time to study the options and make sure to void these three critical mistakes.
1. Don’t Assume Financing is Easily Available
Recreational properties and cottages come at significant costs, and most buyers will probably need financing. However, homeowners have become so accustomed to accessible mortgage practices that they may tend to underestimate the rigour over the lending process. Truthfully, the financing for cottages or recreational properties may be subject to higher lending rates or stricter conditions that a typical mortgage for a home.
When it comes to a cottage, lenders will want to assess:
- Is the cottage accessible year-round? If it’s not, then your lender options are reduced, and you will have to accept slightly higher rates and tighter terms
- What kind of shape is the cottage in? The more remote and rustic the property, the tougher it is to find a lender that will finance it.
- Is there potential for rental income? How much money will this yield?
- Can the property be insured? Flood-prone areas may have limited coverage.
- Are you the sole owner, or are you sharing the ownership with family or friends? The sharing option is viable, but it makes a difference to how the lender handles the application.
If you get a mortgage, don’t assume it will have the same types of conditions as a house. Chances are they will be tighter.
Always make your offer conditional on financing so you don’t get stuck with a property that you cannot find a mortgage for.
2. Don’t Underestimate the Long-Term Costs
When it comes to buying a cottage, but the real financial impact is beyond the purchase price – it actually comes from the ongoing carrying costs.
- Monthly mortgage payments
- Property taxes
- Insurance
- Utilities
- Maintenance
- Repairs
There are a myriad of other potentials costs. For example, where did the down payment come from? If you used a secured line of credit, then repaying that debt is another monthly payment. For the down payment on an average cottage, even the minimum payment could be more than $1000 per month.
3. Don’t Forget Your Other Financial Priorities
Each of these considerations may seem obvious, but the truth is that these decisions are often made on emotion, and buying a cottage can have serious impact on your long-term financial goals.
Indeed, people can be focused on the idea of sitting by the lake in Muskoka chairs rather than real financial concerns. The bottom line is that buying a cottage must be part of your long-term financial plan.
There are some aspects of your long-term financial plan that should be an immediate concern when buying a cottage.
- How does buying a cottage affect your emergency fund?
- How is your consumer debt? Did you use your credit cards to finance the cottage? Or did buying a cottage prevent you from paying your credit card debt?
- Perhaps most importantly, have you re-directed funds from your retirement plan to buy the cottage? Or perhaps the cottage is part of your retirement plan? Your retirement plan in a serious part of your financial plan, so move carefully when possibly shortchanging those savings.
- What about your other goals such as travel, vacations and hobbies? Will buying a cottage require you to compromise on those endeavours?
It’s also important to point out that a cottage is probably your second biggest asset after your home, so when buying a cottage, both your number one and number two asset will be in real estate. The top rule in investing is diversify, so take a hard look at how comfortable you are relying on the real estate markets.
Your Turn
Have you purchased a cottage?
What was the impact on your financial plan?
