When you buy a condo, you buy into a community. While the monthly fees and mortgage process can differ slightly from traditional property ownership, condominiums are an opportunity to grow with your community and have a say in maintaining the structure, amenities and more.
Those who opt to join the board of directors can represent and inform their neighbours and act as a liaison between the community and the Condominium Authority of Ontario. For prospective buyers, knowing the associated fees, benefits, and regulations related to condo living while having the right mortgage will be crucial in setting you up for success. Conversely, existing condo owners consider refinancing their mortgages to access the equity in these high-value properties to pursue other real estate ventures.
For New Buyers
Understanding condo mortgages
Given the booming condominium market in Ontario, you may be looking to mortgage a resale condo or a pre-construction condo. Once you have a substantial down payment saved, you can start looking at condos that fit your needs.
As with any home purchase in Ontario, a minimum of five per cent of the home’s purchase price is required and will have the added cost of mortgage insurance. A downpayment of 20 per cent qualifies the buyer for a conventional mortgage from banks and lenders, which omits the added expenses of mortgage insurance and automatically puts more equity into the condo.
Any condo mortgage will require a credit check, income history, proof of employment, documentation of your debt-to-income ratio, and proof of down payment. Lenders differ in exact qualification requirements, so finding the right loan for you will likely require the help of an experienced mortgage broker.
Understanding the different properties
Co-operative properties
When shopping around for condo properties, you may also come across the more affordable cooperative option, which divides ownership by members to share responsibility for the property.
These housing agreements tend to require a hefty downpayment of at least 20 per cent and, in many cases, even more. However, as an owner, you do not hold the ownership title to a specific unit and may require joining a blanket mortgage with support from secondary financing.
Usually, prospective co-operative buyers must use alternative lenders for this financing. It is essential to know the difference between cooperatives and condominiums as the mortgage approval and application process is very different, each with its own benefits and drawbacks.
Pre-construction vs. resale condos
As a prospective buyer or investor, you have the option of purchasing directly from a developer while the unit is in the pre-construction stage or purchasing a finished unit from an existing owner. Either way, in addition to mortgage options, consider the amenities, condo fees, status of the reserve fund, age of the building, and new home warranty information.
For pre-construction condos, there are more risks to buying, and they require an intensive review of documents related to the purchase agreement and sale and disclosures. Pre-con mortgage approval can be completed as early as two to three years before the project is finished and ready for move-in. However, closing on the property will happen down the line once the building is registered.
A resale condo follows the same procedure as purchasing any other existing property for sale. Except when purchasing a lived-in unit, you have the added resource of an existing board of directors who can provide you with more information about fees, life in the building, and the financial health of the condominium so you can make the purchase decision best for you.
For Existing Property Owners
Condo refinancing
For existing condo owners, you can refinance an existing mortgage to lock in a lower interest rate, access equity to secure a new investment, or improve your existing property.
A top consideration for refinancing property is the associated fees for breaking a current mortgage contract and the closing costs of a new one. However, usually, these costs outweigh the fees, especially if you can refinance at a lower rate, secure equity, and invest in a new rental property that can make you money in the long run.
As the condo market flourishes in metropolitan hubs such as Toronto and Ottawa, there is no better time for existing condo owners to infiltrate the property rental market. As these properties increase in value, it is a great time to consider liquidating equity. This can be done in a couple of different ways, including:
● Home Equity Loans: a lump-sum payment or home equity line of credit (HELOC) is one borrowing mechanism that allows homeowners, including condo owners, to access up to 80 per cent of the appraised property value.
● A cash-out-refinance: This allows you to replace your existing mortgage with a larger loan and access up to 80 per cent of equity. Payments for the new loan may also be larger because you are borrowing more.
Condo shopping for investment properties
Whether you have saved up for a healthy downpayment or liquidated equity on an existing property, investing in a condo to become a landlord is an excellent way to diversify your assets. With the correct mortgage rate and terms, you can cover all associated condo fees and make the investment property work for you.
Leveraging real estate investments such as condos requires less cash flow than you may assume. Properties up to $500,00 will require a minimum of 5 per cent of the purchase price, while anything between $500,000 to $1,000,000 will require 10 per cent down.
The benefit of putting less down for prospective investors is that the interest acquired can be deducted from taxes for rental properties in Ontario. Additionally, some initial closing costs and feeds related to mortgaging the rental property may be eligible for deductions.
Assessing the financial health of condominiums
The financial health of your condo is a measure to assess the quality of the investment and whether the fees charged to residents adequately cover any issues that may arise in the future. Higher condo fees are not necessarily a bad thing as they assume a well-established reserve fund.
This fund is an accumulation of a portion of fees from condo owners that are designated to be used to finance any non-routine repairs the property requires. This fund will be used toward fixing and replacing shared amenities such as the building’s security system or parking areas.
The reserve fund metric is vital for any prospective or current buyer to assess, usually through a reserve fund study, which determines what amount should be in the fund given various structural aspects of the building. If an up-to-date study is not readily available from the current board of directors, consider having a third-party architect or engineer review the structural soundness of the property and determine whether the fund is up to par.
Enlist the help of experts
The condo board
A condo manager or director serving on the board acts as the go-to resource for residents and prospective buyers inquiring about living or investing in the building. Not only do they need an up-to-date understanding of the financial health of the condominium, but it also plays a role in addressing tenant concerns. Good oversight and timely management of maintenance concerns make the condo a more attractive investment for investors and individuals looking to live there.
Mortgage brokers
Whether you are looking to buy your first condo, refinance an existing property, or invest in a condo to turn into a rental, consulting with an experienced mortgage broker is the best way to get unbiased information about all the leading solutions available to you and to help decipher the terms and fees associated with your potential purchase. Brokers in Ontario are free to work with and will be a valuable resource for your next venture in the condominium world.
Jason Anbara is the number one Mortgage Alliance broker in Canada. He comes from a background in finance and commerce, spanning over 18 years and has over 10 years of experience in private lending. He is also the President and Founder of NorthLend Financial, a top-of-the-line Mortgage Administration in Ottawa, Canada.
