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Buying your dream: The lure of a private retreat

Whether for summer, winter, or year-round use, a vacation property that you can call your own is a dream shared by many Canadians. Some people want access to recreational activities, such as skiing or golfing. Others simply want a relaxing environment where their family can meet, away from the stresses of day-to-day life.

Whatever your reasons, it's important to consider the financial implications of owning a second property. Here are some areas to investigate before you purchase your dream retreat.

Paying for your dream

Unless you have the full purchase price in cash, you will need to examine your financing options before buying.

The criteria set by lenders for borrowing against vacation property are often different from those applied to other properties. A mortgage on a vacation property typically has more restrictions than a mortgage on a principal residence, for example. If your home is paid off, you may prefer to borrow against it, rather than take out a mortgage on the vacation property.

"The right solution will vary from person to person," says Heather Clarke, CA and Director of Advanced Financial Planning Support for Investors Group. "We might recommend that a client place a mortgage directly on the property itself, or on their primary residence, or perhaps liquidate other redundant assets to fund the purchase."

Extra costs

Be sure to take into account the additional costs that may come with ownership.

"It's important for people to do a cash flow projection that includes all the costs of ownership, not just mortgage or financing costs," explains Clarke. "This can mean property taxes, insurance, repairs, utilities, even the extras that can enhance the vacation experience such as a boat or recreational vehicle."

To help offset some of these costs, you may want to consider renting your vacation property when you're not using it. You can factor in this additional income to lower the projected carrying costs of the property.

Ownership options

When you make your purchase, you'll need to decide how you want to structure the ownership of your property.

You might decide on sole ownership, in the name of one spouse. If the property is likely to generate a taxable capital gain at some point in the future, you may want to place it in the name of the lower income spouse, if that spouse is in a position to fund the purchase price and make the loan payments. Concerns about potential creditors may also influence your decision.

You can also own the property jointly with another individual, such as a spouse. In such cases, the property passes automatically to the joint owner upon death, and does not form part of the deceased owner's estate. The advantage here is that probate and other estate fees won't apply, and the property won't be held up in the estate settlement process.

There may also be certain advantages to holding the property in a trust, rather than directly by one or more individuals. But keep in mind—ownership issues can be complex.

"There are many factors to consider in structuring the ownership of your property," says Clarke. "To decide on the best structure, it's important to get good advice and consider the issues in the context of your overall estate plan."

Protect your dream

Once you've taken the plunge and made your purchase, it's important to protect your vacation property against unforeseen events. A time of crisis, such as a death or disability, is a difficult time to make financial decisions. Serious cash flow problems could force your family to sell.

Home insurance offers essential protection against such events as fire and theft. If you've financed the purchase, you should also consider life insurance to cover the outstanding mortgage in the event of your death or the death of a spouse.

And make sure you have enough disability insurance to maintain payments if you or your spouse is unable to work. There is typically a less liquid market for vacation properties and a forced sale could net significantly less than the property's true value.

If the lure of a private retreat is something you are considering—call your Investors Group Consultant for more information.

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This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.