Key points:
- A micro condo is a condo unit under 500 square feet. These units are becoming more popular as housing prices increase
- Lenders require micro condos to be located in a major urban centre for financing
- The size and floor plan will affect whether you need mortgage default insurance
Financing micro condos!
Today, we’re diving into the world of micro condos and how to get financing for these properties. As housing prices keep increasing, micro condos are becoming more appealing to many buyers in urban areas. However, financing them can be challenging. Here’s what you need to know about owning a micro condo!
Don’t feel like watching? Find the full transcript below!
Chris: [00:00:00] One of the questions I get regularly as a mortgage broker is how to finance a micro condo, so I wanted to stop by to do a quick video to talk about what a micro condo is, why we’re seeing micro condos and exactly how to finance them. Join me.
What is a micro condo?
Chris: [00:00:28] First, and probably the most practical question is: exactly what is a micro condo? And the definition is very simple. It is a condo unit that has less than 500 square feet. Next, it’s probably worthwhile to address exactly why micro condos exist. Why would anybody want to live in less than 500 square feet? And the reality is, is that there’s both an economic incentive for builders to have more units in a particular parcel or condominium project. And also, as prices continue to get more and more expensive, the reality is is that for many first time homebuyers and many new Canadians, a micro condo may be all the square footage that can be afforded in urban centres like Toronto and Vancouver. Although the market is offering micro condos to the public and they’re being sold, one of the surprising details that comes up after the fact is that financing them can be a challenge. Lenders are very unsure about how they feel about these micro condos that keep on getting smaller and smaller. Five hundred square feet is OK, but the market is currently selling condos as low as three hundred square feet. So let’s talk a little bit about some of the details and the nuances on lender qualification.
Understanding lender requirements
Chris: [00:01:57] First of all, location is very important. I know we always talk about that in real estate, location, location, location, but when it comes to micro condos, it’s critical. So lenders will take a very good look at where the property or the condo is located and make sure that it’s in a major urban centre. So if you’re looking at micro condos in the suburbs or in smaller, smaller markets, that may present a major issue for qualification.
Chris: [00:02:27] The second thing to be aware of is the floor plan. So lenders are comfortable in and around five hundred square feet, even if it’s less than five hundred square feet, as long as there is a defined bedroom in the floor plan. If it’s a studio apartment without a bedroom, it’s fine. It can still be financed, but there will be mortgage default insurance required on that. If you’ve purchased a unit less than five hundred square feet, then down payment starts to matter. So if you’re able to make the purchase happen with thirty five percent down, you can avoid the CMHC insurance premium, what we typically call high ratio insurance or high ratio mortgages. If you have less than thirty five percent down payment, then you can buy with as little as five percent down, but be aware that you will have to pay the additional mortgage default insurance that’s traditionally offered through CMHC.
Chris: [00:03:30] And finally, be aware if you are an investor buying a micro condo that you should expect to have thirty five percent down payment, because with less than thirty five percent down, we require mortgage default insurance and mortgage default insurers are currently not insuring rental properties.
Chris: [00:03:50] My name is Chris Molder. I’m a Toronto mortgage broker. If you found this information useful, please share and leave any comments below. If you live in a micro condo, I’d love to hear from you. If you’ve purchased a micro condo, share your experience and look out for my video on the next one. If you need to reach me, I’m just a phone call or an email away. Bye for now.
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