Buying a Cottage: A Home Equity Line of Credit, Savings, or Capital Built in a Participating Policy

The listing arrives on a Sunday evening. A small cottage on a lake, a few hours from home, at a price that is not impossible. The children are still young enough to want to go. The parents can picture it immediately: summers, long weekends, grandchildren one day.

Then the practical question arrives. How do we pay for it?

For most Canadian families, the answer comes quickly and almost automatically: the bank has offered a line of credit on the house for years, so why not use it? Some families would rather pay cash and spend their savings. And some have heard about another way: building capital in a participating whole life policy over the years, and financing the cottage from it.

Why does this matter? Because a cottage is not one decision; it is three. How to buy it, how to carry it, and how to pass it on. The way a family finances the purchase affects the other two. A cottage bought quickly on a variable line of credit can become a source of stress when rates rise. A cottage bought with every dollar of savings can leave the family without a cushion. And a cottage that has risen in value for decades can create a tax bill at the last parent's death that the children cannot pay without selling it.

This page compares the three ways to buy, the costs and control of each, and the question most families forget until it is too late: how the cottage will pass to the next generation.

It starts with what a cottage really costs.

What does a cottage really cost?

More than its price. Closing costs, property tax, insurance, utilities, maintenance, repairs that arrive all at once, and the cost of getting there. A family should plan for the carrying costs before choosing how to finance the purchase, because the financing adds to them.

The purchase price is the number on the listing. The real cost includes:

• Closing costs: land transfer tax where it applies, legal fees, inspections, adjustments.
• Carrying costs: property tax, insurance, utilities, internet if wanted, road or association fees.
• Maintenance: a septic system, a well, a dock, a roof, a shoreline, often in a climate harder on buildings than the city.
• Surprises: the repair that cannot wait, usually at the worst moment.
• Travel: fuel, time and wear on the family vehicle.

Whatever finances the purchase, these costs continue. A family that is stretched by the financing will feel them twice. Before choosing how to pay for the cottage, it helps to write these costs down for a full year, including a realistic amount for repairs, and to ask whether the family budget can carry them in a year when income is lower than usual.

Option one: what does a home equity line of credit offer, and what does it cost?

Speed and convenience. A line of credit secured by the family home can fund a purchase quickly. Under OSFI's guidance, its revolving portion is limited to 65% of the home's value for federally regulated lenders. The rate is usually variable, the lender sets the terms, and the debt is secured by the home.

For a family with substantial equity in its home, a home equity line of credit is often the fastest path. The approval may already exist. The funds are available on short notice. And the payments can be as low as interest only, which feels manageable.

The limits and costs deserve to be said plainly.

• The limit. OSFI expects federally regulated lenders to cap the revolving portion of a home equity line of credit at 65% of the home's value, and lending above 65% to be amortizing. A combined plan cannot exceed 80% loan-to-value.
• The rate. Usually variable. A plan built on today's rate can look very different after a few years of increases.
• The terms. The lender sets them and can review them. The line is a product of the lender's, on the lender's conditions.
• The security. The family home, not the cottage. If the cottage financing goes wrong, it is the home that secures the debt.
• Interest-only temptation. Paying only interest keeps the payment low and the debt intact. Years later, the cottage is still entirely borrowed.

A line of credit is a useful tool for a family that will repay it on a schedule. It is a risky one for a family that will not. The same comparison, applied to a rental property bought by an investor, is set out on cash-on-cash return with a policy loan down payment.

Option two: what does paying with savings cost?

No interest, but the growth those savings would have earned, and the reserve they provided. Paying cash is usually the cheapest option on rates alone. It can be the most fragile if it empties the family's cushion, or the most expensive if withdrawing the savings triggers tax or penalties.

Paying cash avoids interest entirely, and on rates alone it usually costs less than borrowing at a higher rate than the savings earn. That is the arithmetic set out on earn 8%, pay 13%, and it applies here too.

But two questions matter as much as the rate. What were those savings for? If they were the family's emergency reserve, a cottage bought with them leaves the household exposed to the next job loss or repair. And what would withdrawing them cost? Money in a registered retirement plan is generally taxable when withdrawn; money in a non-redeemable term deposit may not be available or may carry a penalty. Those costs belong in the comparison.

Option three: can capital built in a participating policy finance a cottage?

Yes, if it was built years in advance. A mature, well-funded participating policy can lend against its cash value from the insurer, without a credit application, on a repayment schedule the family sets. The loan carries interest at the insurer's rate, reduces the net death benefit while it is owing, and should be repaid. A new policy cannot do this; its early cash value is small.

This option is the one families hear least about, and the one that requires the most foresight. A participating whole life policy, funded steadily for years, builds a cash value the owner can borrow against. The insurer advances the loan under the contract; under subsection 148(9) of the Income Tax Act, a policy loan is an amount advanced by the insurer to the policyholder in accordance with the policy's terms. No credit application is required, and the family chooses its repayment schedule.

The conditions are real:

• Time. A policy started the year the family sees the listing cannot buy the cottage. Its cash value in the early years is well below the premiums paid. How long it usually takes before a policy can finance a purchase is set out on how long before a policy can finance a purchase.
• Interest. The insurer sets the loan rate under the contract, and it can change. Unpaid interest is added to the loan.
• The death benefit. Whatever is owing when the insured dies comes off what the family receives.
• Tax. A policy loan is a disposition; income arises if it exceeds the policy's adjusted cost basis. Interest on a loan for a family cottage is generally not deductible, because a cottage used by the family does not earn income.
• Dividends. They are not guaranteed, so the cash value beyond the guaranteed column depends on decisions the insurer's board has not made yet.

How do the three options compare on cost?

On rates, they are closer than people expect: a line of credit and a policy loan both charge interest, and savings give up growth. In this page's hypothetical example, borrowing $350,000 at 6.5% costs $22,750 a year in interest either way; paying cash gives up about $10,500 a year at 3%. The real differences are control, risk, timing and what happens at the end.

Here is a hypothetical comparison. Every figure is an assumption, not a quote.

Two lessons come out of that table. They are worth reading slowly, because they run against what many families have been told. First, the line of credit and the policy loan cost about the same at the same rate. A policy loan is not cheaper because it is "your own"; the interest is paid to the insurer. Second, the differences that matter are who sets the terms, what secures the debt, whether the money is there in time, and what the arrangement does to the family's protection.

Which tax rules matter for a cottage?

Three. Only one property per family can be designated a principal residence for any year. A cottage that has gained in value can be taxed when it is sold or on the last parent's death. And interest on money borrowed for a family cottage is generally not deductible.

The principal residence designation. A cottage can qualify as a principal residence if the family ordinarily inhabits it during each year claimed. But only one property per year, per family, can be designated, where family means the spouses or common-law partners and children under 18. A family that owns both a home and a cottage must choose, year by year, which one to designate when one is sold or deemed sold. The sale must be reported, and failing to report can bring a late-filing penalty of $100 a month up to $8,000, and possibly the loss of the exemption.

The gain on sale or death. If the cottage has risen in value and the gain is not covered by the designation, part of the gain is taxable when it is sold. Under subsection 70(5) of the Income Tax Act, capital property is deemed to be disposed of at its fair market value immediately before death; subsection 70(6) lets it pass to a surviving spouse or common-law partner without immediate tax, so the gain is usually taxed on the death of the last surviving spouse, even though nothing was sold. How that works for property is set out on the tax at death on a rental portfolio.

Interest deductibility. Under subparagraph 20(1)(c)(i) of the Income Tax Act, interest is deductible when borrowed money is used to earn income from a business or property. A family cottage is personal use. If part of it is rented, an accountant can advise on what portion, if any, may qualify.

How does the cottage pass to the next generation?

This is where most cottage plans fail, and where permanent life insurance often does its most important work. A cottage that has gained in value for decades can create a tax bill at the last parent's death that the children cannot pay without selling it. A death benefit can provide the cash so the family keeps the cottage.

Families who buy a cottage often say they are buying it for the children and grandchildren. Then they plan the purchase in detail and the transfer not at all.

Here is the problem. A cottage bought for a modest price can be worth several times that a generation later. If the principal residence designation is used for the family home, the cottage's gain is taxable when the last parent dies. The tax is due in cash. The cottage is not cash. If the estate does not have enough cash, the children may have to sell the cottage to pay the tax on it, which is the outcome the parents least wanted. Estates with assets and no cash are discussed on an estate with assets and no cash.

A permanent death benefit, paid on the last parent's death, can provide that cash. It is not taxed as income when it is paid, and it arrives when the tax is due. That is often the strongest reason for a cottage-owning family to hold permanent coverage, whatever financed the purchase.

There is a second, quieter question: how will several children share one cottage? Who pays the costs, who uses which weeks, and what happens if one wants to sell? Those answers belong in an agreement and in the will, prepared with a lawyer or, in Quebec, a notary. How one family planned financing across several children is described in a case study of a family financing system across three generations.

How should a family decide, step by step?

Start with the carrying costs and the family budget. Decide how the cottage will pass to the children. Then choose the financing that keeps a reserve intact, sets a repayment plan the family can keep, and does not put the home at risk.

1. Price the whole cottage, not just the purchase: closing, carrying, maintenance and travel.
2. Test the budget at a higher interest rate than today's.
3. Decide what happens at the end: who inherits, how the children will share it, and how the tax at death will be paid.
4. Choose the financing: a line of credit, savings, a policy loan, or a combination, keeping an emergency reserve intact.
5. Write the repayment plan, with a date by which the cottage is paid for.
6. Review the principal residence choice with an accountant before any sale and in the estate plan.
7. Put the sharing agreement and the will in place with a lawyer or notary.

What changes if you rent the cottage part of the year?

Rental income is taxable, a share of the costs may be deductible against it, and interest on money borrowed for the rented portion may be deductible when that money earns income. Renting can also affect the principal residence designation, the property insurance and the municipality's rules. Each of these needs an accountant's advice before the first guest arrives.

Many families rent their cottage for a few weeks a year to help carry the costs. That is reasonable, and it changes the picture in several ways.

The rental income is taxable. Expenses that relate to earning it, such as part of the property tax, insurance, utilities and maintenance, may be deductible against it, usually in proportion to the rental use. The records need to be kept from the first rental, not reconstructed later.

Interest follows the use of the money. Under subparagraph 20(1)(c)(i) of the Income Tax Act, interest on borrowed money used to earn income from a property can be deductible. If the cottage is partly rented, part of the interest on the money borrowed to buy it may qualify. For a policy loan, the insurer must also verify the interest in the prescribed form for it to count. An accountant should decide the proportion.

Renting can affect the principal residence question. The designation depends on the family ordinarily inhabiting the property during each year claimed, and a significant rental use can complicate it. That is one more reason to discuss the choice between the home and the cottage with an accountant before either is sold.

And renting changes the practical side. The property insurance may need to cover rental use, and many municipalities, and some provinces, now regulate short-term rentals, with permits, registration or limits. A family that rents without checking can find its insurance void or its rental unlawful at the worst moment.

Who should help you?

An accountant for the principal residence choice and the tax at death; a lawyer or, in Quebec, a notary for ownership, the will and any sharing agreement; a mortgage professional for the line of credit; and a licensed insurance professional with years of hands-on experience for the coverage and any policy loan.

The product without the understanding is just an insurance policy. The understanding without experience is just theory. A cottage plan touches tax, estate law, lending and insurance at once, and it works well when those professionals talk to each other. In Quebec, the insurance professional is a Financial Security Advisor (conseiller en sécurité financière); in other provinces, a licensed life insurance agent.

I should be plain about my own position: I am paid by insurer commissions when a policy is bought. That is a conflict of interest, and it is one reason this page shows that a line of credit and a policy loan cost about the same at the same rate.

How should you read the figures on this page?

The $350,000 cottage, the 6.5% borrowing rate and the 3% on savings are hypothetical assumptions, not quotes or forecasts. The lending limits are those of OSFI's guidance for federally regulated lenders, read on 29 October 2026, and the tax rules those of the Income Tax Act as consolidated to 30 September 2026.

Dividends on participating policies are not guaranteed and are declared each year by the insurer's board. Policy loans carry interest at the insurer's rate and are a disposition for tax purposes. Lenders not regulated federally may apply different limits. Amounts are in Canadian dollars. The comparison shows the structure of each option; it does not predict what any one family's cottage will cost.

What this page will not tell you

This page compares general ways to finance a cottage. It does not tell you whether to buy one, what any lender or insurer will charge, which property to designate as your principal residence, or how much tax your estate will owe. Those answers depend on your properties, your income, your health and your family, and they come from your accountant, your lawyer or notary, your mortgage professional and your insurance professional. What it can give you is an order of questions: what the cottage will really cost to carry, how the family will pay for it if rates rise, how the children will share it, and how the tax at the end will be paid. Families that answer those four questions before they sign tend to keep their cottages. Ask your professionals to meet together at least once, with the purchase, the financing, the sharing agreement and the estate plan on the same table, so that no one designs one piece without seeing the others. A cottage plan built in pieces often fails at the joins.

Who this does not suit

Borrowing to buy a cottage does not suit a family whose budget cannot carry the cottage at a higher interest rate, whose emergency reserve would be spent, or who has no plan to repay. Financing it through a policy does not suit a family that has not already built a mature policy, or that has no need for permanent coverage.

A cottage plan that includes permanent coverage can suit a family that wants the cottage to stay in the family, has the income to carry premiums for many years, and wants the next generation to inherit a place, not a tax bill.

Buy the cottage with the end in mind. The summers will take care of themselves.