Dear Expert:
As of last spring a group of us took a personal loan from the bank to purchase a cabin along a river in Nova Scotia. Since then we have repaired and restored the cabin to its former glory. We are interested in financing the purchase of more land and wondering about a secured line of credit. Are the interest rates and payment schedules better on a secure line of credit than on a conventional personal loan? Can it be used as a way to pay off our existing loan and gain more assets? Do lenders offer loans based on the equity in a secondary residence? What are our options if we wanted to acquire more land but do not have the cash? Do secondary residences tend to rise in value; are they wise investments?
Expert Opinion:
This appears to be a very complex situation that you're involved with. I would strongly suggest that you or your group employ professional assistance in organizing your structure, otherwise you may find that there will be serious emotional and financial implications in the future.
You need to make sure that you are not personally liable for the portion of debt that is in effect being paid by others. Proper calculation of all cost base aspects of the property and its improvements need to be tracked rigorously. Certainly a secured line of credit is a reasonable method of obtaining financing. However generally speaking, financing on a non-urban dwelling such as a cabin on a river is often significantly more expensive (and difficult to obtain) than similar financing on a city property. You may find that a very effective solution would be for each member of the group to borrow money on their own merits through their own borrowing capacity and contribute the funds to the partnership. Here is where professional advice would help in the structuring of this so that everybody is protected. A secured line of credit or mortgage financing can be used to pay off any other forms of financing and would generally have a lower rate of interest. Lenders do not offer loans based on equity; their criteria are usually based on the creditworthiness of the individual who is borrowing money and their capacity to repay the debt. Certainly collateral security such as equity in a property is important but that is not the major criteria. Investing in land as a long-term investment and hoping to make a capital gain on it is a difficult position to assess. There is no guarantee that this land will rise in value and there is no guarantee that you will be able to sell the land for any predetermined price in the future. Some effective professional assistance to you and/or your group should provide a series of comments on the most appropriate financing structure for any future acquisitions. Do you have a question?All Ask the Expert questions are read and considered. Unfortunately we can't provide individual responses or respond to every question. Please note that questions about specific securities cannot be considered. Click here to Ask the Expert.
No statement in this article should be construed as a recommendation to buy or sell securities or to provide investment advice or individual financial planning. Morningstar Canada does not provide specific portfolio advice and recommends the use of a qualified financial planner when appropriate.
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