Many Canadians find themselves drawn to cottage life in the midst of the COVID-19 pandemic, but they face a big problem, that’s only increasing in size and price. Simply, they cannot afford to finance a cottage on their own due to rapidly rising real estate prices and the housing bubble that has come out of this consequence of the pandemic. As of early 2021, the average selling price of a recreational home in Canada was $411,000, a number that is still massively under what homes are selling for in housing hot spots like British Columbia’s West Coast, Toronto and the Kawarthas etc.
Coming to this realization has caused some friends and family members to combine their financial resources to purchase a vacation home. If you have recently made that decision, keep reading for some tips on how approach the deal while also maintaining your close relationships.
Treat the Arrangement Like a Business Deal (Because it is)
No matter how close friends or family members may be, they need to make a formal agreement when co-financing such a large transaction. The people making the investment should sit down together and draw up a contract that specifies the following:
- What happens when one party no longer wants to share the property or wants out of the deal altogether?
- Who pays for damages? For example, assume a child of one of the buyers broke a window playing baseball. Would all parties pitch in to replace it or only the parents of the child who broke it?
- Should the parties take care of repairs themselves or hire someone to do it?
- What happens if someone who signed the legal agreement passes away or loses a job and can no longer afford to contribute to mortgage payments on the cottage?
- Who will handle maintenance chores such as mowing the lawn in the summer and shovelling snow in the winter? Most co-owners find that preparing a schedule that divides chores evenly works best. Another thing to consider is who has the greatest availability to respond to an emergency at the cottage, such as frozen pipes?
- What can be mutually agreed upon in terms of use by individual families? Time-sharing? A shared Outlook Calendar?
The best way for you and the other people involved to protect your interests is to draw up a contract with a lawyer. Some people hesitate to do this with family or friends because they fear it sends the message that they do not trust one another. The reality is that unexpected situations can arise, especially if none of the parties have a background in property law. Having written documentation regarding how to handle those situations can help everyone feel more at ease with the purchase.
What Kind of Mortgage Should You Get?
As cottage co-ownership becomes more common across Canada, mortgage bankers have become more flexible to keep up with demand. One option you can explore is applying for a ‘mixer mortgage’. This term refers to a mortgage split into separate terms and unique amortization schedules.
Benefits and Considerations of Buying a Cottage with Friends
People who have bought vacation property with friends compare it to having their own timeshare but with more flexibility and freedom. Friends and family can work together when splitting up the calendar of who visits when. They do not have to worry about locking into certain dates and then losing money if those dates do not work out. Another perk is the ability to leave some of your belongings at the vacation home rather than drag them back and forth with you.
Families with young children can especially benefit from co-owning a cottage together. Their children get to play together when visits overlap, and kids learn about cooperation and teamwork from an early age. From a financial standpoint, cottage co-ownership means a bigger down payment upfront and smaller monthly mortgage payments.
At the same time, not all parties will qualify for a mortgage because every family has a different financial situation and buying power. Experienced mortgage lenders can advise you on what to do in this situation, such as one party taking out a mortgage in their name and the other paying them directly. You will need to get a lawyer involved if you decide to take this route.
Much of the friction that arises from co-ownership occurs due to poor communication about expectations or one party feeling like they are doing more work than the other. Including as much detail as possible in the initial contract is the best way to avoid this situation. Owning a cottage often involves more upkeep than people realize, so going into the real estate deal with realistic expectations is also important.
Congratulations on potentially co-owning your new cottage! You’re one of the lucky ones! Remember to keep the lines of communication open with the other owners so you can enjoy the rewards of your hard work.
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