Banks take hard look at micro condos

Some lenders still nervous about mortgaging units under 500 sf

By Susan Pigg

They are a big hit with real estate investors, but still a source of considerable concern for some lenders.

As micro condos move into the Toronto market with a vengeance, some of the Big Five banks and other lenders still have rules on their books that restrict okaying mortgages on units under 500 square feet.

“I would say there is still some hesitancy around lending on micro condos,” says mortgage broker James Laird, president of CanWise Financial.

“Up until recently, it would be a very odd and unusual condo that would be less than 500 square feet so it’s not so much a ‘No, we won’t provide mortgages on them,’ but it’s a ‘We need to figure these things out because we haven’t seen them before.’”

Some 467 units of 500 square feet or less are currently in the occupancy phase in the City of Toronto, about five per cent of the new condos coming on stream in the core this year, according to condo research firm Urbanation.

An additional 2,868 of these smaller units will occupy by the end of 2015, making up 11 per cent of all the new condos occupying in the City of Toronto, it says. And thousands more are in the planning or construction phases.

But it will be weeks or months after occupancy, when the building registers, before buyers — be they investors planning to rent the units out or so-called end-users planning to live there — will have to come up with final mortgages for 80 per cent or so of the sale price not already covered by down payments.

Brokers are watching closely to see how that next phase plays out, given the fact so many of the A lenders still have guidelines on their books saying they won’t mortgage anything below 500 to 600 square feet. No. 6, National Bank, and secondary lenders don’t tend to have the same restrictions.

“TD does have a minimum square footage requirement,” said a TD spokesperson, without elaborating on the specifics, “however we also review applications on a case-by-case basis.”

Scotiabank, which brokers say won’t finance below 600 square feet, has yet to respond to a request for details.

“They (micro condos) are a new trend so a lot of banks haven’t updated their policies and some had minimums in the past,” says broker Jason Friesen. “The area and marketability is the most important part of the (approval) equation.”

Toronto realtor Andrew la Fleur both sells and buys tiny condos. He prefers to call them studios.

He’s bought four so far, only two of which are built and rented out. One of them, in Regent Park, is among the tiniest condos in the city at 301 square feet. All are mortgaged through RBC.

“The pervasive myth is that you will never get a mortgage on a studio, but no policy is written in stone,” says la Fleur. “I think the banks are run by people who are out of touch with what’s actually happening in the real world in terms of how people are living.

“The banks seem to take the view they are risky in some way, but I think they are the safest investments out there. They are the cheapest to buy, they are the easiest to rent out and they have the best cash flow of any units.”

Urbanation agrees: It studied Entertainment District rental condo rates in the first nine months of this year. It found under 500 square foot condos were going for $3.34 per square foot, compared to $2.80 per square foot for those over 600 square feet.

Shaun Hildebrand, senior vice president of Urbanation, agrees, however, that there is some nervousness around micro condos, largely because they are a great unknown whose value has yet to be established on the resale market.

“They’re associated with investors and will largely be owned by investors, so there are fears they may be more prone to a sell-off (that would devalue their worth) if market conditions turn,” says Hildebrand.

Rony Hirsch is one of the developers behind Smart House, a 256-unit condo tower on Queen St. W. near University where a third of the efficiently designed units will be under 500 square feet.

More than 80 per cent have sold. Hirsch hasn’t heard of any buyers, about one-third of whom he estimates will be end users, who had trouble getting pre-approved for a mortgage.

“I think the banks will reconsider these policies as more and more of these units get built.”

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Roger Townsend

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