Can we afford to buy a cottage?

Question

My husband and I are in our late 20s and have a goal to pay off our mortgage as quickly as possible. We would also like to purchase a cottage within the next five to seven years.  I earn $53,000 and he earns $80,000. We have approximately $1,000 each in consumer debt, and my husband has a $10,000 line of credit for his car. We bought our home two years ago for $276,000 with 10% down. Should focus solely on our mortgage payments, or can we also achieve our cottage dream while we are young?

Answer

I love the cottage life. In fact, we bought our tiny little cottage long before we bought our first home. There is nothing better than a summer sunset on the dock, surrounded by friends and family, with favourite beverage in hand.

But while having a cottage can be relaxing, figuring out how to pay for it can be stressful. And it would defeat the purpose of a cottage if you take on a huge debt load that keeps you up at night, even with the soothing sound of water lapping at the shore.

Here are a few steps to take to help you think through your plan to own a leisure property:

Step 1: What do you want?

You’ve mentioned your dream to own a cottage and pay off your mortgage quickly. But what else do you want for your life together? Do you want to have children? Do you want to retire someday? Do you want to upgrade your home or travel the world? It is important to think holistically about your dreams for two reasons: First, it will make you more focused on your financial planning. And second, it will start to illuminate the trade-offs you’ll likely need to make between those dreams.

For example, if you want children you’ll take a hit on your cash flow. Your incomes will likely fall temporarily if you or your husband takes parental leave, and your expenses will certainly rise as you fork over money for diapers and childcare.

What about retirement savings? You didn’t mention the topic in your email. But unless both of you are blessed with generous defined-benefit pension plans, that should be a part of mix as well. A simple rule of thumb would that that 10% of your combined gross income should be socked away in an RRSP every year. Are you contributing at least that amount?

When you look at everything that you want you have to decide what trade-offs you are going to need to make? Said another way, where does the cottage dream sit on your list of priorities?

Step 2: Look at your current cash flow

Put your life into a simple spreadsheet, using either monthly or annual numbers. What is the total amount of money you have coming in after taxes? And what are the various expenses you have which use up that money every month? That would include your mortgage, debt payments, cell phone plans, retirement savings etc.

Income minus expenses equals cash flow. The number can be either positive or negative. You’re not making any changes to income or expenses at this stage; you’re just looking at what is happening right now.

Step 3: Calculate the cost of cottage ownership

Owning a cottage is similar to owning a house in the city. The amounts will differ depending on your property, but here’s a basic example:

Then there is the monthly mortgage payment for the cottage. I did a simple calculation assuming that you put down 20% and the bank was willing to loan you $160,000 for 25 years at 5% interest. You’d be on the hook for about $1,000 per month.

Based on these assumptions, it would cost about $1,500 per month to own that $200,000 cottage. Go back to your cash flow and see how this amount fits with all the other things you’re spending your money on.

Step 4: Build a plan for the down payment

If you believe that you can cover that $1,500 per month amount, there is still the matter of the down payment. Banks are less excited about lending money for a recreational property because it is higher risk. I used a 20% down payment, or $40,000, but you may find you need more than that, especially because you haven’t built up much equity in your principle residence yet. A quick conversation with a bank lending specialist or mortgage broker would give you more answers on how much you’d need to save based on your income and other debt.

Now let’s say you are able to save $1,500 per month. If so, you would be able to save up that $40,000 down payment in just over two years, which takes you back to your cash flow—can you increase income and cut expenses enough to come up with $1,500 per month based on all those competing interests?

Step 5: Consider all of your options

Owning your own cottage is what you really want, I know. But there are other options that could give you some lake time at a much lower cost. For example:

• Rent: Find a place you love and rent it for one week in prime time summer, then four other weekends in the spring and summer. You’ll be able to do that for under $3,000 a year, with none of the headaches of ownership.

• Share: Consider buying a place with a family member or friend. I know people who have done this successfully, but this option comes with the risk that you’ll fight over the beer bottle caps left in the fire pit, or how much to spend on the new roof. Not to mention the thorny issue of what happens when one party wants to sell their stake.

• Fractional ownership: There are a number of real estate developments that allow you to buy a chunk of time at a cottage, say eight weeks over the course of the year. This idea has a lower sticker price, but doesn’t allow you to make the place your own.

Step 6: Do the basics on financial planning

As you ponder your dreams and crunch the numbers, be sure to do a few key things to get your finances in order.

• Pay off household debt: You both need to get rid of that $1,000 debt immediately. And promise yourselves that you will pay off your credit cards in full every month for the rest of time. High interest debt is the biggest goal grabber out there.

• Eliminate the line of credit: I am pretty sure that your husband’s car debt is costing you more in interest than your mortgage. Figure out how much you can afford each month to eliminate it and get moving.

• Tackle that mortgage debt: When your mortgage comes up for renewal in a few years, you want to avoid mortgage insurance. Get aggressive on those lump sums so you build up as much equity as possible.

You are both young. You own your own home, make good income and have a low level of consumer debt. And you have dreams. Keep those dreams top of mind and do then some solid planning on how to make them come true.

About Bruce Sellery

Bruce Sellery is the CEO of Credit Canada, the country’s longest-standing non-profit credit counselling agency. He is a former MoneySense columnist.