Mortgages for Condos: What You Need to Know Before you Get Pre-approved

Toronto Real Estate News

Presently the largest demographic buying condos in Toronto are young, urban, single professionals. The vast majority of these are purchasing in prime downtown locations with easy access to public transit and the cultural commodities that make Toronto such an appealing city to live in.

Compared to previous generations, who were more inclined to marry young and purchase their first homes together, in 2017, realtors and mortgage companies alike claim that the market has changed: now, as opposed to married couples, single career-oriented young professionals are keeping the condo market alive and allowing it to thrive.

Photo by Green Chameleon
Photo by Green Chameleon

Monthly mortage payments are cheaper than rent in Downtown Toronto

Millennials are buying more than you might think. According to one recent report in the Globe and Mail, an average one-bedroom condo in downtown Toronto rents for approximately $1,500 CAD per month. A condo with similar amenities, purchased for around $300,000, may be cheaper to own—a typical monthly mortgage payment is $1,391.

It makes sense why many millennials choose to buy rather than own when, in many parts of the Greater Toronto Area, it is actually financially wiser to do so. Rent has never been higher in downtown Toronto than it is right now.

While renters, who may struggle to make monthly payments and feel as though they are caught in a cycle of making payments to a landlord with no opportunity for upward mobility and growth, homeowners possess a unique asset. Their property is working for them, rather than the other way around.

Moreover, it can be sold at a later date for considerable profit. Mortgages allow young professionals to own their home rather than pay sky-high monthly fees to a landlord. Whether your plan is to rent out your property, flip it a few years down the road, or start a family, there are a multitude of benefits to purchasing rather than renting. However, if you are considering taking out a mortgage for your first condo, there are a few things you need to know.

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If you're getting a mortgage for a pre-construction condo, keep an eye on your building's occupancy dates

One common prevailing misconception leads many buyers to financial downfall. According to CEO of True North Mortgage Dan Eisner, the most common myth surrounding condo mortgages has led many to "a financially dangerous situation if the client loses a job or even just moves to a new employer."

As with anything, it is best to arm yourself with knowledge before making a financial decision. Many people, particularly first-time buyers, aren’t aware of the fact that you can’t hold a mortgage rate for longer than four months. With the current trend of buying condos in pre-construction, this is impacting more and more people who might otherwise have no trouble obtaining a mortgage.

Buyers who have already agreed to purchase in pre-construction are shocked to learn that although mortgage companies can easily qualify any client who walks in with a purchase agreement in hand, they can’t hold their rate for longer than 120 days.

Eisner goes on to explain:

Many clients come into our office after signing a purchase agreement to buy a condo. A condo that won’t be move-in ready for many months. Furthermore, if possession is more than four months out, you may have to prequalify for that mortgage in the weeks prior to possession.

So, how can this potentially devastating situation be avoided? Firstly, learn the difference between resale and pre-construction mortgages. One of the biggest questions prospective buyers have about buying a condo in Toronto is whether to purchase an existing condo or one in pre-construction.

There are pros and cons on both sides, but many people make their decision based purely on aesthetic or convenience, rather than weighing the financial pitfalls and benefits. If you are determined to buy in pre-construction, the following tips are guaranteed to make your experience easier: Keep an eye on your building’s occupancy dates.

Eisner warns those buying in pre-construction to closely watch occupancy dates to be sure they align with the 120-day limit on their mortgage rate. To keep up with the GTA’s booming demand, many condo builders have taken to selling condos in pre-construction, allowing buyers to sign purchase agreements months or even years before their building is completed, and to move into their specific unit once it is finished, even if the rest of the building isn’t.

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However, Eisner cautions buyers that while this might seem like a good idea, it won’t help you if you’re looking to register a mortgage. Not to mention, there’s a catch: during the time you reside in an unfinished building, you’re technically only renting. Eisner explains:

The condo builder actually rents the property to the buyer until the entire building is finished.This could be a nice convenience for the client but with the actual title of the property remaining with the condo builder, we can’t register a mortgage.

A recent article in the Toronto Star offers a similar warning:

First-time purchasers of new condos must bear in mind that occupancy rarely coincides with beginning to pay off mortgage.

Rates and regulations can change in the blink of an eye.

By the time you’re ready to register your mortgage, you might be expected to pay a completely different rate than you initially planned on. Eisner advises buyers without the financial means to avoid buying too far in advance.

In spite of this, many Torontonians have decided to take the risk and buy in pre-construction. If you are prepared to handle any unexpected changes to rates and regulations, signing a purchase agreement for a building in pre-construction is still a legitimate way of securing yourself a condo in the location of your dreams.

Reading the condo board minutes can save you a lot of hassle down the line. 

Eisner believes that another crucial mistake made by many prospective buyers is overlooking or misunderstanding the condo board minutes. Minutes are important documents written during meetings among condo associations that serve as an official record of all of the actions taken. As such, they provide very useful information that all condo owners should familiarize themselves with.

Typically, condo association boards meet monthly—and an ideal documentation of the minutes outlines literally every single topic discussed, reflecting the association’s ethos and documenting the most significant topics. It is impractical, if not unethical, to hold meetings where certain members of the board are absent.
The very nature of the documentation is to provide unbiased information for condo owners to have access to. Nonetheless, occasionally boards will provide insufficient documentation, or their minutes will be sparse, indicating that they are trying to keep something hidden.

According to Eisner, if minutes hint at a "big special assessment" coming soon after your purchase agreement is signed, you may be in for an unpleasant surprise. Information about negative aspects of the building should be available for condo owners to review in order to make an informed decision before they sign a purchase agreement or take out a mortgage.

Before you start searching for a condo, get a mortgage pre-approval

Even before calling your realtor, you should make it a priority to get in touch with a trusted and reliable mortgage company. Mortgage professionals can provide you with crucial information that will help you with your condo hunt later down the line. More importantly, they will be your support system as you try to land a pre-approval.

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According to independent mortgage website WhichMortgage.ca, a mortgage pre-approval is defined as "the process of deterring whether a borrower meets a particular lender’s guidelines for a home loan." Not to be confused with the similarly named but still strikingly different mortgage pre-qualification (which examines your financial standing more closely), a mortgage pre-approval is a step that must be taken before a lender will allow you to borrow.

The documents required to apply include a photo ID, record of employment, a letter from your employer stating the length of your employment and current salary, proof of assets, account numbers of any bank accounts and investments, and proof of any liabilities including but not limited to student loans or lines of credit. Upon approving that you are in good financial standing, lenders will usually provide you with a written certificate as proof. There’s no guarantee that you will get a mortgage after being pre-approved, but you can be certain that the expected interest rate will remain the same for up to 120 days.

That 120-day period is important. If you’re hoping to get a move on house-hunting quickly, you should consider if gettin pre-approved is the right step for you. This is because the process can last between 60 and 120 days, depending on how long the lender’s guarantee on your pre-approval is.

Typically, pre-approvals don’t take too long, so you can breathe a sigh of relief if you’re concerned that the process might drag on and on. But it is beneficial to get a move on as soon as you can so that you are not further overwhelmed by offer negotiations.

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Calculate your mortgage down payment and test multiple scenarios

Using an online condo mortgage calculator such as that which is provided on Canadian site RateHub, which helps prospective buyers determine not only their mortgage payment but also test out multiple hypothetical down payment scenarios, is the best way to figure out how much you will be expected to pay upfront.

RateHub’s easy-to-use calculator will determine your down payment and mortgage insurance rate based on the asking price of the condo you are interested in. It is advisable to test out a few different asking prices and keep your mind open to other possibilities, in case the calculator informs you that you may be paying steeper rates than you’d hoped for. RateHub’s calculator is useful for more than just deterring monthly mortgage rates: it also warns you of any impending interest rate risks.

You can't avoid interest rate hikes, but you can prepare for them

The truth is, interest rates are steadily rising. Back in the summer, the Bank of Canada (BOC) hinted that interest rates may begin rising as soon as September or October of 2017. Economists agreed that rates would see a significant hike before the end of the year. Though not specific to Toronto, the city and its surrounding suburbs are drawing more prospective condo buyers than anywhere else in Canada, and the GTA housing market has never been hotter—so what does this mean for those who are hoping to purchase a mortgage in the coming few months?

Torontonians with a variable-rate mortgage, as some 30 per cent of Canadians do, will find the situation more problematic. They are guaranteed to see their monthly payments rise when and if the BOC increases the rates.

If you are fearful of rising interest rates, it might make sense to lock yourself into a fixed-rate mortgage instead. In fact, even if your mortgage is variable-rate right now, speaking to your mortgage company about your concerns may prove beneficial; most will be willing to help you switch to a fixed rate during the term of the loan.

Choosing to stick with your variable-rate plan? Fortunately, the BOC has stated they will only hike rates slowly, in increments of 0.25 per cent. This means that if you purchased your condo for $750,000 with a down payment of 10 per cent and have a five-year variable-rate mortgage, your total monthly mortgage payment would be $2,864 after the rate increase, according to the useful rate comparison site RateHub.

However, rate increases will only continue to rise, even if it occurs over a slow trajectory. The Royal Bank of Canada predicts that the BOC’s key interest rate will climb a full percentage point by the end of 2018. If this is true, RateHub calculates that the same owner would be paying almost $350 more a month within a year.

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You CAN get a mortgage, but sometimes it means you need to get creative

If any of this information has left you feeling disheartened due to the instability of your current employment circumstances, there is good news: even if your income fluctuates, you can still get a mortgage. It is not simply those select few millennials in the 1 per cent who are able to afford condos. On the contrary, many Torontonians with limited budgets are finding it possible to buy previously owned condos—as long as they are willing to keep an open mind.

According to this informative article in Mortgage Architects, potential buyers who are self-employed or working in the gig economy are likely to see their income fluctuate, "sometimes wildly." If this is your situation, you may be under the impression that your unstable salary eliminates you from the pool of candidates who can acquire a mortgage. Not so. If your spouse has a stable income, you can work within his or her budget to figure out what you can realistically afford, in terms of a monthly mortgage.

The Mortgage Architects emphasize that couples who are practical, frugal, and flexible are likely to be successful at finding a mortgage that works for them. Those who are willing to settle for less—for instance, purchase a condo in a neighbourhood they hadn’t initially considered—and re-evaluate their needs will have the easiest time buying in the current resale condo market.

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