Lenders are cautious about micro-condo mortgages, but financing options are still plentiful
TORONTO — Canadians looking to buy a home as the real estate market cools may find themselves considering micro-condos, but mortgage brokers say if you’re thinking small, be prepared for additional caveats when the search for funding.
Brokers say many banks’ underwriting policies limit the size of a condo — typically 400 or 500 square feet — to obtain their financing, and sometimes subject buyers of even smaller units to additional conditions or require exceptions. to get a mortgage.
“Is it a speed bump? Absolutely,” said James Laird, co-CEO of financial comparison site Ratehub.ca. “Could this limit your group of lenders ready to lend? Sure.”
But Laird and mortgage brokers say that doesn’t mean you have more options if you buy a micro-condo, the definition of which varies but generally refers to an apartment no larger than 400 square feet. Other estimates put the measure even lower.
Homebuyers for even the smallest properties are still able to find good lenders at reasonable rates, Laird said.
“Sometimes a lender will make an exception if you have a great credit score (or) a great job,” he said. “Even if you’re a little below their minimum (square area), they could still do it.”
Lenders are cautious with small condos due to marketing. If lenders have to take possession of the condo because their borrower is defaulting on their mortgage, they think smaller properties might be less attractive to potential buyers, Laird said.
But their opinions change.
Jason Friesen, managing partner at Outline Financial, a Toronto-based mortgage broker, recalls the first appearance of micro-condos in Canada around 2012.
“It was something a lot of banks hadn’t seen before, and what I find is that every time something is out of the ordinary compared to what banks are used to, what ‘They don’t know, they just say ‘no,'” he said.
The average condo was shrinking at the same time.
Statistics Canada data shows that the average condo in Toronto was around 970 square feet in the 1960s and was around 1,100 square feet between 1970 and 1990 before dropping to 840 square feet between 2001 and 2005. The average condo in the area was 750 square feet around 2011, but by 2016 had dropped to 630 square feet.
Banks have adapted by adjusting their underwriting policies to allow smaller condos, but many have additional requirements for smaller sizes, Friesen said.
He discovered that some require that the unit for which they lend money have at least one bedroom with a door.
Others insist on mortgage insurance, which buyers can normally avoid if they have a down payment of 20% or more.
“Someone who puts down 20% is much riskier in the eyes of the bank than someone who puts down 5 or 10% because…a borrower with less than 20% down payment has to pay that mortgage insurance , which, again, protects the bank in the event that there is a default on the client side,” Friesen said.
Many lenders are also willing to make exceptions, which pop up a few times a month in his office but don’t happen daily or weekly.
Exceptions could be made because borrowers have long-term relationships with a lender, a proven track record of paying off debt and a stable income, he said.
“But for someone who maybe doesn’t have that relationship, who has an investment portfolio with a bank, they can’t leverage things. It is certainly more difficult to obtain this exception,” he said. “A person buying a micro condo tends to be a first-time buyer, so they don’t have a huge amount of assets or leverage with their bank.”
Friesen recommends anyone in this situation looking for financing seek out a mortgage broker.
“(A small square footage) will limit the options, but for the most part they will have enough choice that they are comfortable with the selection they are making from a mortgage perspective.”
Tara Deschamps, The Canadian Press