100% of Condo Fees May be Used for Qualification: National Post

CondosA 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).

debt-ratio-calculations-mortgageAs 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.”

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.

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.

Rob McLister, CMT

  1. The difference is even more obvious with 25-yr amortizations:
    . $5000/month gross income
    . $20,000 down payment
    . 3.79%
    . 25-yr ammortization
    . $200/month property tax
    . $1000/month condo fee (50% = $500/month)
    Max Mortgage = $174,859
    . $5000/month gross income
    . $20,000 down payment
    . 3.79%
    . 25-yr ammortization
    . $200/month property tax
    . $500/month condo fee (50% = $250/month)
    Max Mortgage = $223,431 (28% higher!)

  2. This is the biggest headline this week thanks for giving us your thoughts.
    Some people have speculated that ammortazation changes have direct effects on house prices. When looking at graphs during these periods, it’s hard to argue with them.

  3. I think this is actually not a bad idea as all other debts are included in tds @ 100% condo fees should be as well. There would be a downside, of course as this could potentially disqualify some people from obtaining financing for a condo purchase but could also save some people the head ache of going into default later on as it would give a much more realistic view of a clients ability to make their payments.

  4. There’s nothing that’s optional about a condo payment. The buyer has to beware and take the time to investigate what it does and doesn’t include.
    Condos by their very definition have certain inequities compared to a single family home. You sign away some of your rights to the strata when you agree to purchase and live in a condo. This has always been the case.
    If you are silly enough to move into a building that has a “deal” with the cable company or telephone company for TV or highspeed, then that’s your own problem. Those “deals” are hardly ever cheaper in the long run.
    My condo fees have gone up $75 to $441 in the two years that I’ve had my condo, and the special assessments on top of that have added another $2000 this year (and probably next year as well).
    Had someone told me what me condo fees would be 24 months after I had purchased, I would have never bought. The Government in my opinion has a right to ask you to include the full condo fees in your TDS calculations. There’s obviously no guarantees that the condo fees at the time of purchase will be the same in 12-2 months though.
    I suspect that the condo developers will continue to advertise really low initial condo fees for new buildings, so once the building has been fully occupied and the fees start going up, the government’s requirement for full disclosure of condos fees at time of purchase probably will be meaningless. The condo fees may well rise substantially after the purchase has been made.

  5. Excellent perspective as always. As condo fees are fixed and paid on a monthly basis, there’s no point calculating an individual’s GDS ratio based on only half the payments.
    I believe the government would simply end up breaking down the type of expenses that must be included in the calculation. If, for example, cable and some utilities are included in the condo fee, it would put those who want to own a condo at a disadvantage when qualifying for a mortgage over those who are purchasing a house.
    Moreover, as home prices continue to rise (the average price of a home in Toronto is around $400,000), a condo is seen by many as a cheaper route to home ownership, especially young couples and first time buyers. If these individuals are put at a disadvantage, it could hurt sales of condo units to a point where it starts affecting the entire housing market.
    Hopefully the government would think this through before making any kind of idiotic decisions.

  6. Add the condo fees, chop the amortization, up the down payments, and stop using tax payer money to guarantee everything.
    That is a normal mortgage market.

  7. Thanks Lior.
    If 100% condo fee inclusion came to pass, perhaps we’d see more new condos strip out all but the bare essentials from condo fees (to help buyers qualify and support prices). But then again, maybe that’s overthinking it. :)

  8. @Ray
    Nice to see a Garth Turner supporter show up.
    I always like when a joke breaks up a serious scene. Especially one so silly.
    Good work!

  9. If they want to reign-in things, maybe they should just drop the GDS from 32% to 31%, and throw in a 7.5% downpayment requirement at the same time. No need to increase the condo fee calculation to 100%, unless they’re going to include some sort of arbitrary upkeep estimate for freehold home owners too to keep it equitable.

  10. Your article quotes the following:
    “Here is the current Total Debt Service (TDS) formula used by lenders to qualify borrowers:
    Mtg Pmts + Prop Taxes + Heat + (50% x Condo Fees) /Gross Monthly Income”
    This is the GDS calculation, for TDS all other debt payments would be included.

  11. Since we are at it; how about adding in Income taxes into the whole GDS TDS calculation….maybe Flaherty and Duncan should look themselves in the mirror and start adjusting their spending of our money!!

  12. CTV claiming tonight that Finance Minister is scheduled to announce changes to mortgage rules Monday morning at 8am. The following are on the table:
    1) Maximum amortization to be cut to 30 years from 35 years
    2) Maximum refinancing on insured mortgage to 85% Loan to Value from 90%
    3) No high ratio insurance on line of credit products
    We will have to see if the condo fee issue will be addressed.
    I’m sure everyone will be digesting any changes this coming week. Happy brokering!

  13. 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.”
    This guy is either an idiot or thinks we’re idiots. Prices will adjust themselves to accommodate buyers. “Locked out”… LOL

  14. No problem…It was a busy weekend taking calls from media outlets looking for insight on this.
    All in all, this is not surprising. I believe qualification ratio’s (32/40) will be next to be evaluated and re-assessed.
    Enjoy the week. Vince

  15. I think it’s a good idea to include condo maintenance 100% in the initial calculation. Quite frankly when you calculate the risk of the condo fees going up and special assessments risk it’s not too much to ask. What I would like to know is why rental buildings can offer one bedroom apartments which include heat and hydro for the same price as these brand new buildings are charging only for maintenance fees. It’s almost criminal IMHO. Maybe once unit owners stop leaving condo board duties to nosy old ladies who care more about who has put up an outlawed door knocker or welcome mat than the operating expenses of a multimillion dollar budget.

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