Mortgage Financing for your Condominium, also known as a Condo
Understanding mortgages and financing are extremely important says Linda Pinizzotto, Registered Real Estate Sales Representative and Founder President CEO of the Condo Owners Association. This would be on both new mortgages and refinancing. Rules and interest rates are always changing so Linda has provided COA with this overview for your protection.
Do you Know about Mortgages and the Differences?
If you consider buying a condo
- Do understand the two types of Mortgages?
- Do you know how maintenance fees affect value?
- Do you understand reserve funds?
There are Two Types of Mortgages
- Conventional mortgages – loans with a minimum of 20 per cent down payment
- High ratio mortgages – loans with less than 20 per cent down payment
There are Two Insurance Companies
Condominium Maintenance Fees
The Condo Owners Association is working hard advocating for Condo Owners rights. This will not only provide good direction to the Ministry of Consumer Services in the Condo Act Review and future amendments relating to the Act but it also creates a presence to get the word out that “increasing maintenance fees” need to be addressed moving forward.
COA is a forefront to create awareness recognizing the huge impact that maintenance fees create with respect to value.
- Please take note that 1/2 of the monthly maintenance fees of a condominium are included in the calculation for mortgage financing
- The higher the maintenance fee, the more likelihood that the value of the unit and/ building will decrease
- There is also a consideration for utilities in the equation when mortgage approval is calculated
- A new and improved Condo Act will create better governance and accountability in the operations of a Condominium
Condo Reserve Funds and Operating Budgets
COA believes Condo Owners and all Home Owners should understand the operations of a Condominium and their financial structure, in particular operating budgets and reserve funds.
The financial package of the condominium buildings makes a huge impact on value therefore affecting the mortgage and real estate value. There are key considerations to maintaining value in a condominium building aside from location and good management/maintenance. The Reserve Fund is extremely important, see notes below:
- High reserve funds creates good value within a condominium corporation
- Board of Directors should have studies to determine that the contributions for reserve fund are adequate to provide for the expected costs of major replacement (per item 4 below)
- Board of Directors who follow study reports for major repair and replacement of the common elements and assets of the corporation (as mandated by the Condo Act 1998) helps maintain value of the building and units
- Boards of Directors decisions must comply to all mandates of the Condo Act 1998
Buyers Beware that you need a Status Certificate on all condominium purchases
Note: Condominium purchases in an Agreement of Purchase and Sale should include a condition for the Buyers lawyer to review the Status Certificate which includes the following:
- Condominium Documents
- Auditor approved Financial Report
- Reserve Fund information and accompanying confirmation
- Insurance Company Letter confirming up-to-date condo building insurance and particulars
- Cover letter from the Board outlining unit maintenance fees, arrears etc. relating to Unit of Purchase
- Any additional information relating to the condominium building ie Loans, Liens, Law Suits,
Conventional mortgages are very straight forward. Most financial institutions and/or mortgage brokers can provide you with a conventional mortgage subject to the usual terms and conditions of qualification. Qualification depends on having a minimum of 20 per cent as a down payment of the purchase price of the home you bought and for the lender to calculate your service debt ratio in accordance with your income and ability to qualify for the additional funding required. Most buyers who have qualified for a conventional mortgage with receive the low market place interest rate. There are extenuating circumstances with each purchase that would entail the possibility of a high rate… dependent on the buyers credit history and/or other financial commitments. Each situation is different so we would recommend that all buyers take the time to learn about mortgages prior to purchasing a condominium and/or house. A seasoned Realtor should be able to provide you with direction and/or recommendations/referrals as well
High Ratio Mortgages (include Mortgage Default Insurance)
Buyers will require mortgage insurance if they are purchasing with less than 20% as a down payment in Canada. This insurance is known as mortgage default insurance so that the lender (bank/trust company/credit union) is protected if the homeowner is in default of their mortgage payments; ie if they are not paying their mortgage. This insurance allows the lender the ability to offer the buyers with low down payments the same lower interest rates that any buyer would obtain if they had more equity/down payment.
The mortgage insurance premium is calculated on the amount of the mortgage. Some buyers may take the option to pay it in a lump sum on closing, but generally it is added into the total mortgage amount and small amounts are paid in the mortgage over the length of the mortgage. It is not life insurance; simply mortgage insurance. High Ratio Mortgages are insured by both Canada Mortgage and Housing Corporation and/or Genworth Canada. Please see details and information below:
Condominium Buyers’ Guide (pdf – adobe download)
Condominium Outlooks – for various years
If you are interested in learning more about your credit score
For More Insight into Condominiums
- COA listed on Provincial Government Website (at bottom of page)
- Building a Better Condo Act