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Financing A Cottage, Second Condo or Investment In Toronto and Surrounding Area
Ontarians really like their cottages and 2nd condos!  But since April 19th, and the new stricter lending guidelines obtaining financing is getting a bit trickier than for a principal / primary residence.
Lenders have tougher requirements for second homes, figuring that if you get in financial difficulty, you’ll be more likely to protect your principal residence than the second home or investment.
First, lenders will ask the usual questions they ask for any mortgage. They’ll need to know your income, what other debts you have and your credit rating. Other considerations, such as if you are self-employed, also come into play.    If you are self employed be prepared to provide the last 2 years of your notice of assessments.   Its not as easy as it once was to simply put 25% down and no questions asked.
If the second property is a cottage,  in a remote location or if the building is seasonal or doesn’t have indoor plumbing, for example, the lender may anticipate problems selling it if you default on the mortgage.
 
 
For lending purposes, recreational properties ( cottages ) are classified as Type A or Type B.
Type A properties are in areas with residential zoning and are considered prime properties. They must have a working central heating system and road access year-round.
 
Type B properties can be a little more rugged. They can be seasonal and they don’t have to be accessible year-round.
 
Banks are generally happy to give you a mortgage on a Type A property. You can borrow up to 95 per cent of a Type A property’s value or up to 90 per cent of the value if you are refinancing. Amortization periods of up to 35 years are available.
 
As with your primary residence, Canada Mortgage and Housing Corp. (CMHC) will provide mortgage insurance for second homes, but special rules apply. You need a down payment of five per cent of the value of the home. CMHC says the home "must be intended for occupancy at some point during the year by a borrower; or a relative of the borrower on a rent-free basis."
 
 
 You can only have two properties with CMHC-insured financing at a time. The second home can be anywhere in Canada but it "must be suitable for, and available for, year-round occupancy," says CMHC. "Properties that are constructed for seasonal use or have seasonal access, are not eligible.
   
 
Type B properties are a little less exciting to banks because they can’t be sold as easily, but you can still get financing for up to 90 per cent of the property’s value. However, you can’t refinance these properties and the maximum amortization period is 25 years. Type B properties usually are more expensive to finance.
 
 
If your dreamy shack in the woods doesn’t qualify as even a Type B property, one option is to refinance your primary residence and use the money to either buy the second property outright, or put down a large enough down payment that a lender will play ball.
 
Once you have your financing in place for the second property, next you need insurance. Most insurance policies for recreational properties are "named perils" policies, rather than the comprehensive policies that are common for primary homes.
 
You buy insurance for specific risks that are spelled out in the insurance policy, such as fire and smoke damage. Insurance companies charge more to cover the property for vandalism or water damage, because no one is there year-round and that increases their security risks.
 
In today’s highly competitive mortgage market, it’s always best to shop around before making a decision.   Give us a call to help you make sure you check out all of your options.
Thinking of Buying or Selling - Think Sutton
 Sutton Realty Group Toronto 416-896-3333
Posted: Tuesday, August 17, 2010 4:18 PM by Sutton Realty

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