The Lure of a Private Retreat

By David Adimora

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Whether for summer, winter or year-round use, a vacation property you can call your own is a dream shared by many Canadians. Some people want access to recreational activities, like skiing or fishing. 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.

The right solutions will vary from person to person. For example, it may make sense to place a mortgage directly on the vacation property or, conversely, on your primary residence – or even liquidate other assets to fund the purchase.

Extra Costs

Be sure to take into account the additional costs that may come with ownership. Do a cash-flow projection that includes all the costs of ownership, not just mortgage or financing costs. This can mean property taxes, insurance, repairs, utilities and even the extras that can enhance the vacation experience such as a boat or recreational vehicle.

To help offset some of these costs, consider renting your vacation property when you’re not using it. 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 to register ownership in the name of only one spouse, particularly if the other spouse is a business owner and is concerned about potential creditors.

However, many couples choose to register the property jointly. In such cases, the property passes automatically to the surviving spouse upon death, and does not form part of the deceased owner’s estate. The advantages are that probate and other estate fees may not apply, and the property should not be held up in the estate settlement process. However, in some cases, spouses want to keep their property separate with no automatic right of survivorship (particularly if they have children from a previous relationship).

Keep in mind that ownership issues can be complex. There are many factors to consider in structuring the ownership of your property. To decide, 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 crises, 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 your purchase, you should 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 are unable to work. There is typically a less liquid market for vacation properties. A forced sale could net significantly less than the property’s true value.



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