Canadians eager to buy a home as the real estate market cools might find themselves considering micro-condos, but mortgage brokers say if you're thinking small, prepare for extra caveats when seeking financing.
Brokers say many bank's underwriting policies limit how small a condo can be -- typically 400 or 500 square feet -- to land their financing, and sometimes subject buyers of even smaller units to extra conditions or necessitate exceptions to get a mortgage.
"Is it a speed bump? Absolutely," said James Laird, co-chief executive of financial comparison site Ratehub.ca.
"Might it limit your pool of lenders willing to lend? Sure."
But Laird and mortgage brokers say that doesn't mean you're out of options if you've buying a micro-condo, whose definition varies but generally refers to an apartment measuring no more than 400 square feet. Other estimates put the measurement at an even lower level.
Homebuyers for even the tiniest properties are still able to find good lenders at reasonable rates, Laird said.
"Sometimes a lender will make an exception if you have a great credit score (or) great job," he said. "Even if you're a little under their minimum (square footage), they might still do it."
Lenders are cautious around small condos because of marketability. If lenders have to take ownership of the condo because their borrower is defaulting on their mortgage, they reason smaller properties could be less attractive to prospective buyers, Laird said.
But their views are changing.
Jason Friesen, managing partner at Toronto-based mortgage broker Outline Financial, recalls when micro-condos first cropped up in Canada around 2012.
"It was something that a lot of the banks had never seen before, and what I find is any time something is out of the ordinary from what the banks are used to, what they don't know, they just say 'no,"' he said.
The average condo was shrinking at the same time.
Statistics Canada data shows the average Toronto condo was about 970 square feet in the 1960s and sat at roughly 1,100 square feet between 1970 and 1990 before falling to 840 square feet between 2001 and 2005. The average condo in the region was 750 square feet around 2011, but by 2016, had dropped to 630 square feet.
Banks adapted by adjusting their underwriting policies to allow for smaller condos, but many have extra requirements at small sizes, Friesen said.
He's found some require the unit they are lending money for to have at least one bedroom with a door.
Others insist on mortgage insurance, which buyers can normally avoid if they have a down payment of 20 per cent or more.
"Someone who's putting 20 per cent down is way riskier in the bank's eyes than somebody who's putting five or 10 per cent down because … a borrower with less than 20 per cent down has to pay this mortgage insurance, which again, protects the bank in the event that there's a default on the client side," Friesen said.
Many lenders are also willing to make exceptions, which crop up a few times a month in his office but are not a daily or weekly occurrence.
Exceptions might be made because borrowers have long-term relationships with a lender, a proven track record of paying off debt and a steady income, he said.
"But for someone that maybe doesn't have that relationship, have an investment portfolio with a bank, they can't leverage things. It's definitely harder to get that exception," he said.
"Someone buying a micro-condo tends to be a first-time buyer, so they don't have a huge amount of assets or any leverage with their bank."
Friesen recommends anyone in this situation looking for financing to seek a mortgage broker.
"(Small square footage) will limit the options, but for the most part, they'll have enough choice that they're comfortable with the selection they make from a mortgage perspective."