A National Post source claims the government may start requiring that 100% of condo fees be included in debt ratio calculations for insured mortgages.

Currently, lenders use only 50% of condo fees for qualification purposes. That’s because condo fees include things like property maintenance, insurance, contingency funds, and sometimes even utilities (like electricity or cable TV), all of which are not used in debt ratio calculations for free-hold properties.

Here is the current Total Debt Service (TDS) formula used by lenders to qualify borrowers:

PITH + (50% x Condo Fees) + Other Debts /
Gross Monthly Income

PITH = Principal + Interest + Taxes (property) + Heating

The typical TDS guideline is 40-42%, and well-qualified borrowers are usually allowed up to 44%.

Given a $500 average condo fee (the figure quoted by the Post), a 100% inclusion rule would increase that borrower’s obligations by $250 a month in a lender’s eyes.

If that person made $60,000 a year, this rule change would slash the mortgage amount they’d qualify for by approximately $48,000 (13%!).¹

That would have a chilling effect on the condo market. For that reason, it’s no surprise that condo developers, among others, are seriously concerned.

Toronto real estate broker, developer, and TV personality Brad Lamb, says: “A lot of people are going to get locked out of buying a condo, which, in most cities in Canada, is the most affordable option for housing…It’s a terrible idea.” (CTV)

The National Post quoted a less diplomatic Lamb as saying: “All it is is a knee jerk reaction by idiot bankers pressuring idiot politicians that don’t understand the nature of the condominium market in Canada. What is driving the condominium market in Ottawa, Vancouver, Toronto and Montreal is investors. This won’t affect them. This just attacks the lowly first-time buyer.”

One thing to remember is that condo fees are not optional. They are mandatory payments and owners who don’t pay their condo fees can lose their property. Condo fees have an even greater lien priority than a mortgage (meaning the condominium corporation usually gets paid before the lender if an owner defaults).

As a result, incorporating 100% of condo fees in debt ratios seems intuitively reasonable, just like it’s reasonable to include other mandatory liabilities in debt ratios (like car payments, credit line payments, etc.).

The tricky part is that condo fees also include “optional” expenses (like cable TV, property upgrades, upkeep for swimming pools, gyms, tennis courts, etc.). Free-hold home buyers don’t need to include these expenses when qualifying for a mortgage. As a result, a 100% condo fee rule would create additional inequity between the financing standards for condo and non-condo properties.

Prime Minister Stephen Harper, for one, is tight-lipped about all this. When questioned about these potential changes, he said: “I am not going to feed those particular rumours. I know those rumours are out there.”

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Sidebar:  The Post story also went on to state:

“It is almost a guarantee that the government will once again lower the maximum length of amortizations for a mortgage, down to 30 years from 35.”

We’ve written on that topic before so we won’t rehash it in detail. Suffice it to say, new restrictions on amortizations and down payments are reasonable for the minority of overleveraged homeowners.

On the other hand, amortization restrictions are horrendously short-sighted policy-making for hundreds of thousands of highly-qualified homeowners. Those homeowners often have completely legitimate reasons for using extended amortizations to augment their cash flow.

Few would argue against down payment or amortization restrictions being imposed on those who add undue risk to the system, but over-regulating the personal finances of responsible, well-qualified Canadians serves virtually no good interest.

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¹ Assumes a qualified applicant with strong credit, a 35-year amortization, property taxes at 1%, a 44% total debt service ratio, and a 3.79% 5-year fixed rate.

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Rob McLister, CMT