In many ways, buying a condo is just like buying a house: most people finance the purchase with a mortgage, use a real estate agent to help with the search, and get the property inspected and appraised before closing the deal.
But buying a condo requires a few additional considerations that don’t apply to other kinds of homes.
Here’s what you need to know about condo financing, how to qualify for a condo mortgage and extra costs to prepare for.
» MORE: What is a mortgage?
How a condo mortgage works
While there is no such thing as a specifically designed “condo mortgage,” there are some unique considerations when using a mortgage to buy a condo versus other types of houses.
What remains the same is the type of mortgage you can use to buy a condo, including fixed rate and variable rate mortgages, as well as amortization and payment frequency options.
Condo financing requirements
The biggest factor to consider when financing a condo is how your various debt service ratios are calculated.
Debt service ratio calculations for condos
Your gross debt service (GDS) ratio evaluates your monthly housing costs as a percentage of your gross (pre-tax) monthly income. When buying a detached house, housing costs include your future mortgage principal and interest, utilities and property taxes. When buying a condo, housing costs also include 50% of your monthly condo fees are included in the GDS calculation.
Your total debt service (TDS) ratio for a condo includes your total housing costs, plus all other debt payments and the other 50% of monthly condo fees.
The Canadian Mortgage and Housing Corporation, or CMHC, will only insure mortgages with up to 39% GDS and 44% TDS. However, applicants with no more than 32% GDS and 40% TDS have a better chance of passing the mortgage stress test.
» MORE: What is mortgage insurance?
Is it harder to get a mortgage for a condo?
Depending on your cash flow, it can be more difficult to get a condo mortgage due to the extra fees that will be included in your GDS and TDS calculations. Condo fees may seem like a pain, but it’s more of a tradeoff: owners of detached houses have similar — possibly higher — expenses in the form of maintenance and repairs.
In addition to having a down payment, appropriate debt service ratios, and the ability to cover various costs associated with home ownership, if you’re buying a resale condo, you’ll need extra cash on hand to acquire and review the condo corporation’s financial statements and status certificate. These documents are important for demonstrating solvency and healthy management of the building as a whole.
For new condos, you may also see charges for any of the following (depending on the province you are in):
- Development charges.
- GST or HST on the sale price.
- GST and PST or HST on appliances.
- Warranty program enrollment.
- Utility hookup.
- Two months’ common expenses to build a reserve fund.
- Occupancy fees (payable if you move in before the condo is registered).
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How to get a condo mortgage in Canada
Applying for a condo mortgage is much like applying for financing to buy any other home, in that there is a lot to consider. Here are some suggestions to make the process go smoothly.
It’s important to compare mortgage offers from several lenders. The first one that approves your application may not offer the best rate, and even a small reduction in your mortgage rate can mean thousands of dollars saved.
If you like working directly with a human being, but don’t want to spend time comparing offers, consider seeking out a mortgage broker. These financing professionals usually earn their commission from the lender, so you typically won’t pay directly for their services. While they are generally considered to be impartial and will shop around to get you the best mortgage for your needs, if you feel you are being unduly pushed towards a specific product, it might be because they’re angling for a better commission.
» MORE: How to choose a mortgage lender
Your mortgage broker or lender of choice can help you get pre-approved for a mortgage, which makes your offer more attractive to sellers (important in a hot market), and also gives you a realistic estimate of what the lender is willing to let you borrow.
While a mortgage pre-approval is a lender’s promise that they’ll give you a mortgage at a certain rate, you will still have to go through all the motions again to apply for your actual mortgage. If the mortgage rates, your financial information or the housing market has changed in the meantime, the terms of your mortgage may also change.