Financing Recreational Property-12 things you NEED to KNOW

Barrie Vattoy 604-618-8108

Given the current values of recreational property, for most people obtaining mortgage financing to purchase such a property is a necessity.

Recreational property can take many different forms, from a hotel condo unit in Whistler to a cabin in a remote area of the province. Mortgage financing for these types of properties can be also extremely varied.

In general, the easier a recreational property is to finance, the higher amount, better rates, terms and number of lenders to provide the mortgage are available.

Some items to consider are.

  1. Location: the single most important factor which will determine how much financing which may be available to purchase. In other words, a lender will be willing to provide up a mortgage up to 75% of the value of the property in a well settled resort/recreational area. The more remote a property the less likely a lender will be willing to place a mortgage on it.
  2. Form of Ownership: The nature of the legal interest in the property. A fee simple interest (most properties are owned in fee simple) is the easier type of ownership to mortgage. Strata title ownership (condo) is commonly found in resort areas is also easier to finance. The types of ownership which are more difficult to finance are condo hotel units, where a hotel runs the project and the unit forms part of a rental pool. Leased land, timeshare and fractional ownership are also more difficult to finance.
  3. Property Value: Most lenders have minimum mortgage amount they will place on a property. This amount tends to range between $20,000 to $25,000. An exception to this would be a Chattel Mortgage used for a mobile home where the amount could be as low as a few thousand of dollars.
  4. Income: The amount of income the property generates, if any will be an important factor for a lender in assessing the amount of mortgage they will approve. If the plan is to use the recreational property for personal use only, then it will be necessary for the borrower to prove to the lender they have sufficient personal income to make the payments on the recreational property mortgage, as well as their personal mortgage(s) and other financial obligations.
  5. Type of Property: Single family homes, condo and town homes are the best types of property for lenders to finance. Mobile, mobile, floating and other types of homes are more difficult to finance. Vacant or raw land is the most difficult to finance.
  6. Services: The more services a property has the easier a mortgage can be obtained. A fully serviced property will have good year round access, power, phone, cable, water and sewer. A property with no power, no water, summer access and an outhouse will be difficult to finance. Recreational properties which obtain drinking water with wells often will have to have the well water tested for to ensure it is safe to drink prior to the lender advancing the mortgage funds.
  7. Insurance: In order to obtain a mortgage on any property the borrower must have an insurance policy in place to protect the property.
  8. Qualified Borrower: As with any mortgage, the borrower must be meet certain requirements by the lender. These include a stable source of income, good credit rating, and an acceptable level of.
  9. Sources of Financing: The traditional sources of mortgages, banks, trust companies and other lenders all have specific policies when it comes to financing a recreational property. Some have more of an interest in resort/recreational market than others. Most lenders will only finance a maximum of 75% of the value of the property. There is a specialized lending institution that will finance up to 85%, but will charge a higher rate and fee to do so. Some lenders prefer to provide this financing only to their existing clients. Sometimes a small credit union near the area of the property can be a good source of financing as they will have local knowledge of the area. One of the most common sources of financing is the buyers own home or another real estate holding. Using the equity in ones home to finance a purchase can allow the overall level of financing to be 100% of the value of the property. Also, many of the lender’s restrictive lending policies can be avoided. Finally, there are private lenders who will look at financing high risk recreational property. However, they will charge much higher rates and have more expensive terms.
  10. Appraisers: At some point in the mortgage approval process an appraisal will be required. If the property is somewhat remote, it will be necessary for the appraiser to charge for travel time. The can increase the cost of the appraisal significantly and it would not be unreasonable to pay $400 to $500 for an appraisal.
  11. Lawyers/Notaries: It is recommended to use a local lawyer or notary public to handle the closing. They often will have local knowledge of any issues which may affect the title and closing of the transaction. It is important to confirm with the lender the chosen Lawyer or Notary can prepare the mortgage documents, otherwise, a separate lawyer/notary acceptable to the lender will have to prepare the mortgage, thereby increasing the overall legal fees by a few hundred dollars.

In summary, obtaining a mortgage for recreational can be a difficult process. It is highly recommended to obtain a Mortgage Pre-approval prior to searching for that sought after and well deserved recreational property.