New federal rules mean condo owners can buy back their condos before they become a liability
The federal government has finalized rules to allow condo owners to buy back properties and to use those proceeds to refinance their loans.
But there are still questions over whether condo owners will actually be able to use the proceeds to buy new properties, and whether it will be possible for them to make good on their mortgage obligations.
The rules are part of the Canada Mortgage and Housing Corporation’s (CMHC) $50-billion-plus plan to rein in mortgage rates, which have risen faster than inflation since the global financial crisis.
In 2016, the CMHC projected that mortgage rates would stay steady until 2033, meaning that condo owners who want to refinances their mortgages could do so after 2037, when the average home price in Canada will have risen more than 10 per cent.
“If we do that and the market keeps going up, I think that would be a very good thing,” said Chris Prentice, an economist at Bank of Montreal.
“The more you refinance your mortgage, the more you are able to keep that rate low.”
That would mean that for the first time, condo owners would be able, under the rules, to refract a portion of their mortgage into a property.
It would also give condo owners a way to reduce the risk of a default on their mortgages by using the proceeds of the sale of the condo as a down payment for a downpayment on a new home.
In addition, the rules allow condo buyers to keep their interest rates as low as 5 per cent on their condo loans.
“We will be able as an industry to continue to make decisions on how to leverage the value of the real estate,” said Brian Prentice of the Toronto-based Urban Developments Association.
In an interview, Prentice said condo owners should be able tap into their equity in the deal by purchasing another condo or buying back some of the units they already own.
But he said condo buyers shouldn’t expect to be able sell their condos and refinance at a lower rate because of the rules.
“You’re going to have to go through the process of getting a loan refinance and all the hoops and all that,” he said.
“There’s no magic bullet that will allow you to do it.
But the way it’s structured, it makes it easier for you to get that loan referrals.”
The rules will also help ensure that the cost of buying a new property doesn’t increase too much over time.
Prentice said the new rules will not apply to condos that have already been sold, and only apply to those properties that have been sold within a specified time period.
He also said there won’t be any limits on the amount of the interest rate that condo buyers can use on their loans, and that condo loans will be treated as long-term debt.
“It’s going to be a little bit more aggressive than it’s ever been,” he noted.
Prentices prediction of condo owners not using their proceeds for renovations was supported by a report from real estate consultant Urban Developations.
Urban Developings said that the rules could actually make condos more attractive for condo owners, who are more likely to want to spend more on renovations.
“They are going to get more bang for their buck, and they’re going be able spend more,” Urban Developing’s CEO, Paul Pritchard, said.
He also noted that some of those refinancing costs are expected to be covered by the proceeds from the sale, so that condo investors will still be able buy back the units.
“I think that’s going in the right direction,” he added.