Mortgages for Co-op and Co-ownership Properties

Co-op and co-ownership properties offer exceptional value for the right type of buyer. These buildings are usually well-located in established neighbourhoods and their units are typically much larger than today’s new-build condos, with generous principal rooms, high ceilings and multiple bedrooms. Yet demand for these types of properties is limited because of their more complex and restrictive ownership structures, and this is reflected in their comparatively bargain basement prices. Today’s post summarizes the legal differences between condominiums, co-ops and co-ownership buildings, and explains how these differences impact your mortgage financing options.

A standard condominium unit affords you the same rights of ownership as a detached house – you can buy, sell, and usually rent the unit whenever you choose, and your rights are standardized and protected by the Condominium Act of Ontario. A traditional condo has its own deed and includes a proportionate but undivided interest in common areas, such as the lobby and grounds, and these are maintained using a reserve fund which the unit owners contribute to on a regular basis. You pay your own property taxes, and you are not liable for other unit holders who do not pay theirs. This structure affords condo owners a broad and deep pool of different lenders when assessing their mortgage options.

In a co-operative ownership structure, commonly referred to as a co-op, instead of buying a specific unit and receiving a real estate deed for that unit, buyers purchase shares in a corporation that owns and manages a building. These shares come with the right to occupy a specific unit, called a leasehold interest but the ownership of the unit rests with the corporation. Each co-op is governed by its own incorporation documents, bylaws, rules and regulations, and as such, co-op owners do not enjoy the same automatic statutory protections granted to traditional condo owners in the Condominium Act. (To cite one example, co-ops are not required to have a reserve fund set aside for future repairs and maintenance, although most still do.)

Co-op owners also share more expenses, such as property tax bills, and they are indirectly liable for any bills not paid by other owners. These shared liabilities help explain why many co-ops require that their members gain board approval when buying, selling, or mortgaging their shares, or when attempting to rent out their individual units. While these constraints will be seen as a big negative to some potential buyers, others might not mind submitting to more rigorous oversight if it means that other co-op shareholders are subject to the same scrutiny and standards.

Co-ownership properties are essentially a hybrid between traditional condos and co-ops. Instead of shares in a corporation that owns the building, purchasors buy a percentage of the building’s title (think of it as buying a piece of the overall deed) and this also comes with the right to occupy a specific unit. Co-ownership regulations and by-laws are specific to each property, meaning that they too fall outside of the Condominium Act statutes. Co-ownership buildings also include shared liability for common expenses, but offer a little more overall flexibility than co-ops because they are less likely to require board approval for buying, selling, mortgaging or renting.

Both co-op and co-ownership structures make it harder and more expensive for lenders to foreclose on borrowers in the event of default. That means there is less competition for these types of loans, and as a result, the interest rates offered can vary substantially. Partnering with an experienced independent mortgage planner will help minimize additional interest-rate costs, which can range from .5% to 1%+ above the best available market rates.

Lenders will typically insist on a minimum down payment of at least 30% of the purchase price for both types of properties, but a mortgage agent who specializes in financing these types of properties may be able to reduce that minimum down payment to 20% instead. Also, because these loans demand a higher level of due diligence, they usually require an upfront administration fee of around $250 (which may be refunded if the deal falls through).

Lastly, given the detailed and specific legal expertise required to execute these transactions, don’t be surprised if the lender insists that you choose from a short list of real estate lawyers that they work with on a regular basis. In these cases, the right legal specialist can save both you and the lender time and money.

Many co-op and co-ownership buildings were originally financed with blanket mortgages, and if your building has an existing blanket mortgage in place, your lender will have to agree to have their mortgage in second position. This means that in the unlikely event of total default, the blanket mortgage would be paid off first. While many of these buildings were built in the 1950s and have long since paid off their original blanket mortgages, if they haven’t, it adds another wrinkle to the process.

There is certainly more complexity involved in buying and owning a co-op or co-ownership property, but the substantially lower selling prices certainly compensate you for the inconvenience, and despite the increased potential risks of owning these types of properties, many of them are as well run today as any traditional condominium. These generally smaller buildings are often found in prime locations, they tend to have lower turnover and usually attract a more mature clientele.

There is a sub-group of potential buyers who would be surprised to learn that this combination of features can be had for a discount. If you’re part of this group and are willing to venture beyond the beaten path in search of value, co-ops and co-ownerships are well worth a look.