The prospect of having a second home you can escape to on the weekend is exciting. Although the idea is appealing, there are lots of things to consider. Before making such a big investment, it’s critical to evaluate your needs, draw up a budget and make sure you’ve got adequate coverage.
Evaluate your needs
Go over your needs and wants. Be sure to write them down and get the whole family involved. Do you have a specific location in mind? It’s much easier to do preliminary research by narrowing it down. You might want to choose a location based on how close it is to your principal residence. Are you looking for fast, easy access, or do you want to get far away so you can really unplug? Do you want internet? Are you planning to work from there? Your answers will help you find the type of property that fits your lifestyle.
You also need to ask yourself how often you plan to use the cottage. If it’s just a few weekends a year, it might be better to rent a place when you need it.
Good to know: Short-term rentals
Renting out your cottage to cover some of the expenses could be a good investment provided you’re well-informed. Here are a couple of things to keep in mind:
- You can rent out your cottage when you’re not there, but be sure to check with the municipality to find out the rules in effect regarding how long and how often you’re allowed to rent it out.
- Rental income will have a tax impact. All of your rental income must be declared and you’ll have to pay tax on it.
Evaluate your budget
Once you’ve determined what you need, it’s time to consider your budget.
When you’re applying for mortgage pre-approval, a personal finance advisor can help you make a list of expenses involved in buying a second home and calculate your monthly payments. Keep in mind that your mortgage payment could also increase if rates go up.
To get an idea of your ability to pay, you can use this tool: Calculate how much you can afford to spend on a home.
This tool takes into consideration fixed expenses, like property taxes, school taxes, heating and electricity.
Remember to include your insurance premiums.
Also be sure to calculate how much you need to pay for the home inspection, land transfer taxes, legal fees and furniture.
You should also factor in car travel and maintenance expenses.
Once you’ve drawn up a budget, it’s time to start looking for the perfect cottage External link. on real estate sites such as DuProprio® (available to Quebec residents). Beware of bidding wars, stick to your budget and above all, don’t let your emotions get the better of you.
Evaluate your coverages
Home insurance
Be sure to contact your general insurance agent to review your home insurance needs.
Your agent will ask you about the construction quality and whether there has been any water damage caused by a sewer backup, water seepage or flooding. If the cottage is on a river, they can tell you if water damage coverage, including flood coverage, is available depending on the eligible insurance product and type of property.
Are you planning to rent out your cottage when you’re not using it? It’s important to let your insurer know so they can determine if you have sufficient coverage and add rental activity to the insurance policy coverage summary.
How often you plan to stay at your cottage (yearly, occasionally) or how often you’ll be renting it out will also influence the choice of coverage.
Loan Insurance
The mortgage payments on your cottage will probably make up a big part of your budget. Enrolling in Loan Insurance ensures your investment is protected in the event of death or disability. Depending on the percentage of coverage you choose, your mortgage payments will be made in whole or in part in the event of a claim. Ask your broker about Loan Insurance when you’re taking out your mortgage; they can give you more information.
Planning your mortgage repayment strategy is as important as knowing how much you can borrow. Your Desjardins advisor will carefully go over your documents and put together a profile that considers your current and future needs, financial capacity and lifestyle.
Build a bit of wiggle room into your budget for unexpected expenses and future rate increases.
Life and disability insurance
Your financial security advisor will also help you review your individual insurance coverages. In the event of disability, you want to be sure you can meet your financial commitments, in addition to coverage for the mortgage, which is insured by Loan Insurance.
It’s important to know that when a secondary residence is sold, gifted or bequeathed, a taxable capital gain is generated and 50% of the gain is added to your income for the year of the transaction. The gain is the difference between the selling price and the purchase price.
For more information about selling a secondary residence and the tax impact, read our article Thinking of selling your cottage?
In the event of your death, your estate might be burdened with a large tax bill, because the cottage would be considered a bequest. Make sure now that your life insurance would cover this tax on capital gains in the event of your death. It would be a shame if your heirs had to give up the cottage because they didn’t have the cash available to cover the taxes. Your advisor can help you make an informed decision based on your situation.
Every case is different, so it’s important to get the right advice so you can choose the insurance product that best meets your needs.
Buying a cottage is the perfect opportunity to get away from the city and create new memories. Make sure you have a clear plan that takes your needs and budget into account and protects you should something unexpected happen—so you can rest easy!