Small is the new big when it comes to up and coming condo developments in the city of Toronto. In an effort to maximize density and keep real estate affordable for an ever more expensive market, builders are designing smaller and smaller units.
Aside from the obvious challenges of living in smaller spaces there is a little talked about problem regarding financing small condo units under 500 square feet.
It is next to impossible to find a lender who will provide mortgage financing on condo units under 500 square feet.
Mark Savel, realtor and Toronto blogger picked up on the alarming lack of information regarding the challenges of getting mortgage financing for smaller units. In a recent post on his blog www.torontolivings.com we did a little Q&A to address the issues surrounding small condo units.
The following is an excerpt from his original post. The original blog post can be found here http://torontolivings.com/the-risk-of-buying-a-studio-apartment
Is there a size threshold that banks consider too small?
The short answer is that there is no official threshold considered by lenders. However anything less than 500 sq feet would be pushing the lender and require special consideration. The number one concern of any lender is marketability meaning how desirable is the property. How easy would it be to sell in a down market or if the borrower doesn’t pay? My experience suggests that there is little appetite from lenders for these types of units. If you are considering buying a condo with less than 500 square feet be sure to sort out the financing before hand.
Must the unit have a dedicated bedroom ie JR. suites?
Yes. Having an “enclosed” bedroom will help the lender with their decision. Again it comes down to marketability. The conventional thinking in the market is that having a bedroom is more desirable than an open studio concept.
Are there any lenders outside of the big banks that will lend? (ie trust companies, lenders looking to corner this market?
Yes. Outside of the big 5 there are some more progressive Canadian mortgage lenders and credit unions who will make exceptions on low square footage condos.
Is it only CMHC backed mortgages where these issues arise?
Actually the Canadian default mortgage insurers like CMHC and Genworth don’t have any official guidelines when it comes to low square footage. They have the same concerns as the lender about marketability however if a lender is willing to provide the financing the insurer will back it up.
Can a buyer put down a large amount (over 20%) and get funding?This question goes hand in hand with the previous question regarding CMHC and insurance. It is possible to purchase a low square footage condo with less than 20% down payment however it is much more difficult because you need the approval of the lender and the mortgage insurer. By providing 20% or more as a down payment you eliminate the need for the insurer’s approval. This should make it easier when push comes to shove.
Any further comments or observations regarding low square footage condos?
Again, the lender’s main concern is marketability. Builders and developers are pushing the envelop today on size. Since new ground is being pushed on many projects today there will be a period of limbo where lenders don’t know how to assess these smaller units. However, if small units prove to be a strong and sustainable market then I think lenders will change their policies to accommodate smaller units in the future.
1) If you can find a lender for your studio apartment, expect to be playing on their terms. Given the greater risk banks have forecasted – higher than normal rates, less flexibility, and fewer lenders to compare with should all be expected.
2) When considering an offer on a resale condo, you MUST put in a financing condition even if you’ve been pre-approved. I’d suggest asking for 5 days (at minimum) as you may need extra time to find a lender and get the approval.
3) Work with an experienced mortgage broker well aware of these changing trends. There are a lot of “yes-men” out there who just haven’t put together these types of deals. Given their typically low list price, many may overlook the challenges of getting the green light.
4) Every approval is on a per deal basis. A building where several studios have recently sold may be looked at more favorably than one that hasn’t. Even still, speak with your lender well in advance and seek clarification on their past dealings!
5) Consider the larger unit. Although it may cost more today, it’ll give you a greater pool of buyers for when you sell it!
6) The changes in lending have only become more known in the last 8-12 months. For owners who bought before that and are now looking to sell, you may want to see if your mortgage may be assumable. If not, offering a vendor-take-back mortgage may be another creative option for speeding up the sale of your condo!
My name is Christopher Molder. I’m broker/owner of Tridac Mortgage located on the Danforth in Toronto.