Don’t-pay-til-you-die reverse mortgages are booming in Canada as seniors binge on debt
Already carrying debt, many seniors can’t downsize because they can’t afford high rents, so turn to reverse mortgages for a new source of income
Reverse mortgages are surging in Canada as more older people join the country’s debt bandwagon.
If you’re 55 or older, you can borrow as much as 55 per cent of the value of your home. Principal and compound interest don’t have to be paid back until you sell the home or die. To keep the loan in good standing, homeowners only need to pay property tax and insurance, and maintain the home in good repair.
“We’ve only been in this market for 18 months, but applications are jumping,” and have tripled over the past year, Andrew Moor, chief executive officer at Equitable Group Inc., said in an interview. The company, which operates Equitable Bank, sees the reverse mortgage sector expanding by about 25 per cent a year. “Canadians are getting older and there is an opportunity there.”
Outstanding balances on reverse mortgages have more than doubled in less than four years to $3.12 billion (US$2.37 billion), excluding foreign currency amounts, according to June data from the country’s banking regulator. Although they represent less than one percentage point of the $1.2 trillion of residential mortgages issued by chartered banks, they’re growing at a much faster pace. Reverse mortgages rose 22 per cent in June from the same month a year earlier, versus 4.8 per cent for the total market.
The fact that these niche products are growing so quickly offers a glimpse into how some seniors are becoming part of Canada’s new debt reality. After a decades-long housing boom, the nation has the highest household debt load in the Group of Seven, one reason Bank of Canada Governor Stephen Poloz may be reluctant to join the global monetary-policy easing trend.
More seniors are entering retirement with debt and the cost of rent has shot up in many cities, making downsizing difficult amid hot real estate markets. Reverse mortgages offer a new source of income.
Canada’s big five banks have so far shied away from the product. Only two lenders offer them in Canada. HomeEquity Bank, whose reverse mortgage has been on the market for 30 years, dominates the space with $3.11 billion on its books. Equitable Bank, a relatively new player, has $10.1 million. Shares in parent Equitable Group have surged 75 per cent to a record this year.
Critics say reverse mortgages are a high-cost solution that should only be used as a last resort.
“When they think of their cash flow, they’re not going to get kicked out of their house, but in reality, it really has the ability to erode the asset of the borrower,” Shawn Stillman, a broker at Mortgage Outlet, said by phone from Toronto.
Interest rates are typically much higher than those for conventional mortgages. For example, HomeEquity Bank and Equitable Bank charge 5.74 per cent for a five-year fixed mortgage. Conventional five-year fixed mortgages are currently being offered online for as low as 2.4 per cent.
Atul Chandra, chief financial officer at HomeEquity Bank, said the higher rates are justified because the lender doesn’t receive any payments over the course of the loan.
“Our time horizon for getting the cash is much longer, and generally the longer you wait for your cash to come back to you, the more you need to charge,” Chandra said in a telephone interview.
Executives at HomeEquity Bank and Equitable say they are focusing on educating people about reverse mortgages to avoid mistakes that were made in the U.S. during the housing crisis — including aggressive sales tactics.
While delinquency rates on regular mortgages are still low for seniors, they were the highest among all age groups in the first quarter, at 0.36 per cent, according to data from the federal housing agency. The 65-plus demographic took over as the most delinquent group at the end of 2015. For non-mortgage debt, delinquency rates in the 65-plus category have seen the biggest increases over the past several quarters, Equifax data show.
Reverse mortgages aren’t included in typical delinquency rate measures — borrowers can’t be late on payments because there are no payments — but they can be in default if they fail to pay taxes or insurance, or let the home fall into disrepair. However default rates for reverse mortgages have remained stable, even with the strong growth in volumes, said HomeEquity’s Chandra.
According to a scenario provided by HomeEquity Bank, a borrower who took out a reverse mortgage of $150,000 at an interest rate of 5.74 per cent would owe $199,058 five years later. A home worth $750,000 when the reverse mortgage was taken out would be worth $869,456 five years later, assuming 3 per cent annual home price appreciation, meaning total equity would have grown by about $70,000.
Professor Chris Mayer has a lesson for homeowners: Reverse mortgages, which let older Americans tap their home equity without selling or moving, aren’t as risky as some say. In an online video, he brushes aside “common misconceptions,” including fears about losing your home.
Mayer, a real estate professor at Columbia Business School, isn’t an impartial observer. He’s chief executive officer of a company that sells reverse mortgages. He’s trying to rehabilitate one of the U.S.’s most-reviled financial products—part of a broader push that relies in part on academics with interests in the mortgage industry.
The host of Mayer’s talk was the American College of Financial Services, a school that trains financial planners and insurance agents. Until recently, it had a task force funded by reverse mortgage companies, which each contribute $40,000 a year. They include Mayer’s firm, Longbridge Financial, and Quicken Loans’ One Reverse Mortgage.
To show the need for reverse mortgages, industry websites cite a Boston College retirement research center run by Alicia Munnell, a professor and former assistant secretary of the Treasury Department in the Clinton administration. She once invested $150,000 in Mayer’s company, though she’s since sold her stake.
The six-year-old task force cites key successes. Mainstream publications have run articles quoting positive research on the loans, and financial planners are growing more comfortable recommending them. The Financial Industry Regulatory Authority, the securities industry’s self-regulatory agency, in 2014 withdrew its warning that reverse mortgages should generally be used as “a last resort.”
Mayer and Munnell said they’ve fully disclosed, in research, appearances, and interviews, their financial interest in the lender. Columbia and Boston College both said they approved the arrangements.
The professors and industry officials say these government-backed mortgages deserve a second look, partly because of a series of federal reforms in recent years designed to protect taxpayers and consumers.
“We are looking to help people responsibly incorporate home equity in their retirement planning,” Mayer said of Longbridge.
Reverse mortgages let homeowners draw down their equity in monthly installments, lines of credit or lump sums. The balance grows over time and comes due on the borrower’s death, at which point their heirs may pay off the loan when they sell the house. Borrowers must keep paying taxes, insurance, maintenance and utilities—and could face foreclosure if they don’t.
While even critics say the mortgages can make sense for some customers, they say the loans are still too expensive and can tempt seniors to spend their home equity early, before they might need it for health expenses.
Fees on a $100,000 loan, based on a $200,000 home, can total $10,000. Because the fees are typically wrapped into the mortgage, they compound at interest rates that can rise over time. Homeowners who need cash could be better off selling and moving to less expensive quarters.
“The profits are significant, the oversight is minimal, and greed could work to the disadvantage of seniors who should be protected by government programs and not targeted as prey,” said Dave Stevens, CEO of the Mortgage Bankers Association until last year and a commissioner for the Federal Housing Administration in the Obama administration.
Academics represent a new face for an industry that’s long relied on aging celebrity pitchmen. The late Fred Thompson, a U.S. senator and Law & Order actor, represented American Advisors Group, the industry’s biggest player. These days, the same company leans on actor Tom Selleck.
“Just like you, I thought reverse mortgages had to have some catch,” Selleck says in an online video. “Then I did some homework and found out it’s not any of that. It’s not another way for a bank to get your house.”
Michael Douglas, in his Golden Globe-winning performance on the Netflix series The Kominsky Method, satirizes such pitches. His financially desperate character, an acting teacher, quits filming a reverse mortgage commercial because he can’t stomach the script.
In 2016 administrative proceedings, the U.S. Consumer Financial Protection Bureau accused American Advisors, as well as two other companies, of running deceptive ads. Without admitting or denying the allegations, American Advisors agreed to add more caveats to its advertising and pay a $400,000 fine.
Company spokesman Ryan Whittington said the company has since made “significant investments” in compliance. Reverse mortgages are “highly regulated, viable financial tools,” and all customers must undergo third-party counseling before buying one, he said.
The FHA has backed more than 1 million such reverse mortgages. Homeowners pay into an insurance fund an upfront fee equal to 2 percent of a home’s value, as well as an additional half a percentage point every year.
After the last housing crash, taxpayers had to make up a $1.7 billion shortfall because of reverse mortgage losses. Over the past five years, the government has been tightening rules, such as requiring homeowners to show they can afford tax and insurance payments.
In response to public concerns, Shelley Giordino, then an executive at reverse mortgage company Security 1 Lending, co-founded the Funding Longevity Task Force in 2012. It later became affiliated with the Bryn Mawr, Pennsylvania-based American College of Financial Services.
Giordino, who now works for Mutual of Omaha’s reverse mortgage division, described her role as “head cheerleader” for positive reverse mortgages research. Gregg Smith, CEO of One Reverse Mortgage, said the group is promoting “true academic research,” including work by professors with no industry ties.
In January, the American College cut its ties with the task force because the school, as a nonprofit institution, wasn’t comfortable being affiliated with an organization endorsing products, according to Vice President James N. Katsaounis. “A proper retirement portfolio is one that is well-balanced and diversified, which may or may not include reverse mortgages,” he said.
Mayer, the Columbia professor and reverse mortgage company CEO, said many older consumers could benefit from the loans because they can never owe more than their house is worth even if real estate prices plunge.
A former economist at the Federal Reserve of Boston with a Ph.D. from the Massachusetts Institute of Technology, Mayer joined the Columbia faculty in 2004 and currently co-directs Columbia’s Paul Milstein Center for Real Estate. He wrote his first paper on reverse mortgages in 1994, when the FHA product was five years old.
In 2012, Mayer co-founded Longbridge, based in Mahwah, New Jersey, and in 2013 became CEO. He’s on the board of the National Reverse Mortgage Lenders Association. He said his company, which services 10,000 loans, hasn’t had a single completed foreclosure because of failure to pay property taxes or insurance.
While many colleges let professors engage in outside business activities, Gerald Epstein, a University of Massachusetts economics professor who’s studied academic conflicts of interest, said Columbia may need to scrutinize Mayer’s arrangement closely.
“They really should be careful when people have this kind of dual loyalty,” he said.
Columbia said it monitors Mayer’s employment as CEO of the mortgage company to ensure compliance with its policies. “Professor Mayer has demonstrated a commitment to openness and transparency by disclosing outside affiliations,” said Chris Cashman, a spokesman for the business school. Mayer has a “special appointment,” which reduces his salary and teaching load and also caps his hours at Longbridge, Cashman said.
Likewise, Boston College said it reviewed Professor Munnell’s investment in Mayer’s company, on whose board she served from 2012 through 2014. Munnell said another round of investors in 2016 bought out her $150,000 stake in Longbridge for an additional $4,000 in interest.
She said she now prefers another approach: States allowing seniors to defer property tax payments. The advantages include “no fee, no paperwork and no salespeople,” she said. In one way, she’s glad she exited her reverse mortgage investments.
“Anytime I had a conversation like this, I had to say at the beginning that I have $150,000 in Longbridge,” she said. “I had to do it all the time. I’m just as happy to be out, for my academic life.”
Source: Copyright Bloomberg News – Business News 13 Mar 2019
They say death and taxes are the only two constants in life, so the question is, what happens to your mortgage when you die?
The short answer, according to Donna Lewczuk, a mortgage agent with Dominion Lending Centres, is “If you’re single and have no insurance, the executor of the estate will sell the property and pay back the mortgage. If you are married you can continue with the mortgage if you are able to make the payments.”
That’s because the mortgage stays with the property, not the person or persons, says Mary Wahbi, a partner at Folger Rubinoff LLP who looks after estates. “Not much will happen when you die, the mortgage isn’t triggered on your death and isn’t payable then but it is still your debt.”
The debt remains even after you die. Mortgages are also considered secured loans and the lenders want their money and they will come after your estate to get it. Secured creditors have a leg up when it comes to loans and if there is security, like your home, they will get paid first.
If you’re the sole owner of the property and you have a will, the executor of the estate will have the authority over your estate. They can either sell the property and use the money to discharge the mortgage or if there is enough money to carry the costs, the mortgage can continue to be paid. If you die without a will, Wahbi says that someone will apply to the court for authority over your estate and then the same decisions will be made regarding your property.
If you bought your home with a spouse, more than likely you’re considered joint tenants (check your legal documents from when you bought your home). When one joint tenant dies, the other gets the home automatically by right of survivorship and the home doesn’t pass through the deceased’s estate. So the spouse can continue to make the payments if they can afford it and then when the mortgage comes up for renewal, they can decide if they want to keep the home and negotiate a new mortgage based on their financial standing or sell it.
Now if you bought the home with a friend, you’re not considered joint tenants. You’re considered tenants in common and the surviving person doesn’t have the right of survivorship. The share of the home, the asset, becomes part of the deceased’s estate and is distributed according to their will. Even then, as there is still a mortgage, the secured creditors are still the first ones to get paid out of the estate.
“Banks don’t care who’s paying the mortgage once they get paid,” says Wahbi.
Condos reign supreme in Canada’s hottest cities. The majority of first-time homebuyers in Vancouver, Toronto and Montreal are picking condos, in part due to affordability challenges with single-family detached residential homes. Here are the numbers behind Canada’s condo explosion.
Do you want a condo or house? As a first-time homebuyer, this question is probably the first you’ll answer before starting your home hunt. Budget is a large factor, as is region: condos are king in urban markets like Vancouver, Toronto and Montreal, while houses are the go-to in Calgary and on the East Coast. Want to know what’s right for you? Take our “Condo or House?” quiz to shed light on your condo or house dilemma.
Condo or House?
Answer each question below, noting which answer you picked. Use our answer key and tally up your points to find out what’s better for you: condo or house.
Question 1: Can you afford to spend $500,000 or more on your first home?
Question 2: Do you work from home?
a) Yes, most or all of the time.
c) I may occasionally bring light work home.
Question 3: Are members of your household very busy with outside activities, or do you tend to be homebodies?
a) We’re very busy and spend a lot of time outside.
b) Most of our hobbies are home based.
c) It’s a mix in our household.
Question 4:Do you enjoy outdoor chores like yardwork, gardening and home maintenance?
a) Yes, I love working on my home and garden.
b) No way!
c) I’m not sure, but I’d consider it.
Question 5: Do you like to entertain friends and family in your home?
a) Absolutely! We love hosting big family dinners and dinner parties.
b) Sometimes, but we’re more into parties than sit-down meals.
c) Yes, but we prefer intimate get-togethers, like having a couple of dinner guests over at a time.
d) No, we prefer to host guests in a restaurant.
Question 6:What best describes your household composition?
a) Living solo and loving it!
b) We’re a couple, with no immediate plans for kids.
c) We’re a couple, getting ready to start our family.
d) We’re a full house of four or more, looking for room to grow!
Question 7: Minimalist living: yay or nay?
a) Yay: I am the queen (or king) of clutter-free living!
b) Nope: I like personalizing my space with my objects.
If you selected A, add 10 points.
If you selected B, add 5 points.
December 2017’s national average house price was $614,575. While houses can be had for less, even in big cities like Edmonton, Ottawa and Montreal, those who live in the Greater Vancouver Area or Greater Toronto Area will find that a budget of half a million dollars limits them to condos.
If you selected A, add 15 points.
If you selected B, add 5 points.
If you selected C, add 10 points.
Those who work from home should prioritize home office space; a spare bedroom is ideal. Others can get by with a small computer station or even converting a closet into a tuck-away office.
If you selected A, add 15 points.
If you selected B, add 5 points.
If you selected C, add 10 points.
The more time you spend at home – and the more members of the household that join you – the more home you’ll need for comfort.
If you selected A, add 15 points.
If you selected B, add 5 points.
If you selected C, add 10 points.
Owning a house comes with both seasonal tasks (shovelling snow, gardening, raking leaves, etc.) and weekly chores (taking the trash and recycling to the curb).
Avid home chefs and entertainers will benefit from a roomy kitchen and an open-plan kitchen/dining/living area. A large backyard would be a perk. Condos needn’t cramp your style if you have smaller get-togethers, or if you host your birthday bash in a party room, the perfect pop-up spot for canapés and mingling.
If you selected A, add 5 points.
If you selected B, add 5 points.
If you selected C, add 10 points.
If you selected D, add 15 points.
Although condo living is adaptable, at a certain point a growing family may be bursting at the seams and need more room to roam.
If you selected A, add 5 points.
If you selected B, add 10 points.
Decluttering will keep your smaller space looking sharp. While houses also look their best when belongings are edited, they do provide more hiding spots for those things you’ve been meaning to purge (but haven’t gotten around to yet!).
Tally up your points and find out whether a condo or house is better suited to your lifestyle.
If you scored:
35-55: Confirmed Condo-ista
Between price and lifestyle considerations, urban condo living is ideal for you. You’ll love the convenient, maintenance-free condo lifestyle and, of course, being in the heart of the city’s action.
60-80: Ambivalent Shopper
Aspects of condo living (convenience, price point) hold strong appeal for you, but you’re also considering a house you can grow into. It wouldn’t hurt to explore both options, plus townhouses, which offer a bit of each home type.
85-95: Hard-Core House Hunter
You’re looking to live large in a home that does your lifestyle justice – and you’re willing to pay a premium and put in sweat equity to do it. You’ll love turning your house into a home, with room for the creature comforts you cherish.
Veronica Dy and her husband had their retirement plan all mapped out.
They recently sold their large family home in San Gabriel, California, for $850,000 and walked away with $250,000 in net proceeds to put toward a smaller home in Los Angeles to be closer to their son’s family. They figured it would be easy to find a quaint, two-bedroom home where they could age in place without overspending on housing.
They thought wrong. The couples’ home search came up empty week after week, and the few properties within their budget – about $550,000 – are selling well over asking price almost immediately, Veronica Dy says.
Now, the couple spends roughly $3,200 per month – nearly half of their monthly household income – on rent and other housing-related expenses farther out from the city as they keep looking. While they’re trying to remain optimistic, the uncertainty of their situation makes Veronica Dy, 61, doubt that they’ll retire anytime soon.
“I was waiting to retire when I’m 62 but with our current circumstances, now we’re playing it by ear,” says Dy, who works in health care. “I look every day for houses, but there’s nothing on the market that’s affordable. I wanted to live closer to our son and help them with our grandchildren, but it’s going to be hard.”
The Dys’ struggles are shared by a growing number of older Americans who wrestle with whether to downsize or age in place. The answer, as it turns out, isn’t so simple.
In its just-released 2018 Survey of Home and Community Preferences, AARP found that 76 percent of Americans age 50 and older prefer to remain in their current home, and 77 percent would like to live in their community for as long as possible. However, just 59 percent of older Americans think they’ll be able to stay in their community, either in their current home (46 percent) or in a different home still within their area (13 percent).
Rising mortgage rates, sky-rocketing home prices, and inventory shortages at the lower end of the market are converging to create a new housing crisis – this time for baby boomers, housing experts warn.
Aging in place vs. downsizing: Which is best?
By 2016, there were roughly 74.1 million baby boomers (people born between 1946 and 1964) in the U.S, according to a Pew Research analysis of U.S. Census Bureau data. By 2030, when all baby boomers will be between 66 and 84 years old, Census predicts boomers’ numbers will drop to 60 million people.
As boomers age, an alarming trend has emerged: they’re entering their golden years with mortgage debt. Americans over the age of 60 were more than three times as likely to carry mortgage debt in 2015 compared to 1980, according to an analysis of Census data by the Center for Retirement Research at Boston College. Much of the increase in seniors’ mortgage borrowing is in households with below-median incomes and assets, and no pensions, the analysis found.
Generally, past generations aimed to have their mortgage paid off before retirement to better manage their reduced incomes later in life.
Carrying mortgage debt may offer one explanation as to why many baby boomers prefer to remain in their current homes. Other factors, such as retaining home equity, staying in familiar surroundings, or a lack of affordable options, also drive the decision to stay put.
Aging in place, however, can be harder to do if boomers’ homes aren’t equipped to meet their future needs, says Jennifer Molinsky, senior research associate at the Joint Center for Housing Studies of Harvard University.
“There’s a growing linkage between housing and health care, and being able to stay in your house longer,” Molinsky says. “Making your house accessible for [in-home health care] is ideal, but this is harder to manage in lower density areas because of limited transportation and accessibility to doctors in rural areas. Communities need to think about how these services interrelate with housing, because that’s a real challenge for the future.”
Tapping equity to stay put
Mobility and health issues pose the greatest barrier to seniors who want to stay in their current homes. Older homeowners may need to add amenities, such as bathroom grip bars, walk-in showers, wheelchair ramps, and wider hallways and doorways to accommodate walkers or wheelchairs as their mobility declines. Some of these improvements are simple, but when you start redoing bathrooms, for example, remodeling projects can add up quickly.
Seniors who own their homes outright or have significant home equity typically borrow against their homes to help pay for modifications, says Sam Preis, regional director of sales with BBMC Mortgage.
Several loan products can help older homeowners pay for improvements that will make their homes livable for years to come. Preis recommends the following options:
Home equity loan – A home equity loan makes more sense if you have to make several modifications at once and need an upfront lump sum to pay for them.
Home equity line of credit, or HELOC – A HELOC works like a revolving line of credit that lets you withdraw on the line as often (or as little) as you need it for improvements in stages.
VA financing – Many older veterans who served in the military mistakenly think their VA benefits expire, but that’s not true, Preis points out. The VA offers cash-out refinancing, typically with no down payment requirement, to pay for home improvements. The VA also provides special grants for adapted housing for veterans with a service-connected disability. The grants help pay for a remodel or the purchase/building of a new home that accommodates their disability.
Reverse mortgages – A federally insured Home Equity Conversion Mortgage, or HECM, is the most common type of reverse mortgage. Insured by the Federal Housing Administration, HECMs allow people who are 62 or older to tap a portion of their home equity without having to move. You also can use a HECM to buy a home.
Low inventory, rising rates create barriers to downsizing
At the crux of boomers’ dilemma is the shortage of affordable homes on the market. That, along with rising mortgage rates – a trend that’s expected to continue – can create significant barriers to downsizing, says Laurie Goodman, vice president of housing finance policy and codirector of the Housing Finance Policy Center at the Urban Institute.
The national average rate for a 30-year fixed mortgage hit a record low of 3.41 percent in July 2016, according to historical data from Freddie Mac. As of Aug. 30, 2018, the average 30-year fixed rate was 4.52 percent – more than a full percentage point higher.
“Higher rates have a huge effect on mobility for everyone,” Goodman says.
Baby boomers who plan to stay in their current communities are likely to have the upper hand in competing for a smaller, less expensive home if they’ve paid off or have significant equity in their current home thanks to inflated appreciation. The key question is whether they’ll find the right home for their needs amid inventory shortages in the lower end of the market.
Seniors’ mobility could be impeded if they try to relocate to more expensive markets to be closer to family than where they currently live, especially given higher rates and rising prices, Goodman points out.
“There’s a limited supply of homes, along with rising prices – that’s a problem that’s not correcting and it’s getting worse and worse,” Goodman says.
Restrictive zoning laws and higher land costs are pushing builders to focus on producing luxury single-family homes (rather than economical multifamily projects) to remain profitable, Goodman says. The key to encouraging more building is a revamp of local zoning rules to enhance the variety of new housing projects, she adds.
Older Americans thinking outside the traditional housing box
In a lot of U.S. communities, a lack of housing variety complicates the picture for baby boomers who are seeking affordable options. And for some older folks, economic necessity is giving rise to creative solutions that buck tradition.
The AARP survey found that adults age 50 and older are open to housing alternatives, such as home sharing (32 percent), building an accessory dwelling unit (31 percent) and villages that provide services that enable aging in place (56 percent).
Whether it’s for economic viability or to gain companionship, seniors’ willingness to think outside the box is driving the growth of unconventional housing solutions, says Danielle Arigoni, director of livable communities with AARP. The “Golden Girls” style of roommates is one shared-housing arrangement gaining steam. There’s also intergenerational home-sharing; an online platform called Nesterly, for example, matches older adults with college students who are looking for roommates.
“An affordable housing crisis is brewing and, in many places, it’s already here,” Arigoni says. “[These solutions are] becoming less taboo and more accepted. And that’s partially just recognition of the financial realities we’re all accepting.”
The appetite for home-sharing is being driven by a resurgence in accessory dwelling units. An accessory dwelling unit is a smaller, secondary building that’s attached to the primary home or located on the same lot. This type of housing (think granny flat or mother-in-law suite) offers a livable solution for seniors who want to age in place and generate rental income, live near family, or eventually bring in-home care help down the road, Arigoni says. The key roadblock to add accessory dwelling units, though, is securing approval from local zoning or building authorities, she notes.
Whether downsizing or staying put is in your future, housing expenses will undoubtedly play a huge part of your overall retirement picture. Preis, with BBC Mortgage, suggests crafting a financial plan for retirement (if you haven’t already). Sit down with a financial advisor, a mortgage lender (if you plan to finance a home purchase or tap your home’s equity), and your accountant to figure out what options will help you live comfortably while maximizing your retirement income, Preis says.
The decision to downsize or age in place isn’t just about affordability or the place you call home. Consider how close you’ll be to family, friends, doctors, hospitals, transportation, parks, cultural attractions, and other key amenities that make a community truly livable, Arigoni says.
How much are you paying each month in condo maintenance fees and what do those fees truly pay for? If you don’t know the answer to that question, you might want to read this study.
Maintenance fees (MF) are a constant topic in condo real estate, both during your search process and once you own a home. Back in 2015, we released a study that revealed the truths and myths behind maintenance fees in Toronto condos. But two years is a long time, especially in today’s real estate climate, so we’ve come back with our Maintenance Fee Report 2.0.
But first, a bit of maintenance fee 101
Every homeowner will pay maintenance fees in one form or another. Whether you have a freehold house or a condo apartment, a homeowner’s maintenance fees cover a wide range of home upkeep costs from lawn care to roof repair.
For a freehold house, the everyday upkeep costs will vary from year to year, depending on the condition of the house and whether there’s a need for sudden repairs. Unexpected costs are the most common worry with owning a freehold house. When a pipe bursts or the furnace quits, you can be hit with a sizable bill.
For condos, the maintenance fees tend to follow the rate of inflation, acting as a fund for the on-going upkeep of your unit and building in a range of ways. That fund, if managed well, can keep unexpected costs away for good.
That’s the key benefit of the structure of condo maintenance fees over freehold: the potential to remove sudden, unexpected costs.
It’s not surprising that there are a lot of misconceptions surrounding condo maintenance fees. In this report, we’ve picked the most common concerns that our Condo Pros hear from clients and broken them down into true or false answers.
1. Maintenance fees have no legal increase limit
There is no legal regulation regarding the amount that a condo building’s maintenance fees can be increased annually. There is a general rule that maintenance fees increase to adjust with inflation and/or the needs of the building. Condo corporations are non-profit entities made up of unit owners within the building, not an outside group. The cost of operation adjusts for the true cost of maintaining the building. The condo board members who may vote to raise maintenance fees are in the same boat as all other owners in the building.
2. Lower maintenance fees mean lower monthly costs
Maintenance fees cover different elements from building to building. Some buildings include the cost of water, heat, hydro, insurance, and other elements in the maintenance fees. Others may not. If those elements are not included in the maintenance fees, you will have to pay them separately. That’s why it’s important to know exactly what your maintenance fees cover. A low maintenance fee does not necessarily mean low monthly costs.
The maintenance fee that includes water, heat, hydro, and A/C is obviously more expensive, but these elements must be paid regardless. If you’re paying for these elements separately, the total monthly costs could be much higher than if they were included in the maintenance fees.
3. Smaller boutique buildings are less expensive than high-rise towers
Condo building maintenance fees depend on a lot of factors. At the top of the list is the building’s footprint and the number of units. Between two buildings of a similar footprint, it doesn’t matter if the buildings are five-storeys or forty. It will cost the same amount to maintain and repair the roof. That cost is dispersed across the units. The more units, the broader the dispersal; and the lower the fee for each individual unit.
Building amenities are another key contributor with a range of factors. But it still has to do with the number of units. A concierge service shared between ten boutique units will be more expensive per unit compared to a concierge shared between 400 units.
Between two buildings of a similar footprint and similar amenities, the one with more units will tend to have lower maintenance fees. However, the building with more units will have a higher opportunity for wear and tear of common elements, which might in the long run cost more to maintain.
4. Maintenance fees always spike within 3-5 years for new buildings
TRUE AND FALSE
Every building is managed differently. Builders often market new buildings with low maintenance fees to make them more appealing to buyers. Once the condo board takes over, it is common to see fees undergo slight increases as the board fills out the reserve fund. After an initial increase, however, fees should stabilize. In the case of well managed properties, maintenance fees even come down. For instance:
5. Low maintenance fees are a sign of value
Maintenance fees should be priced in accordance with the true cost of operating and maintaining the condo building. If that true cost is low, and the maintenance fee is low, then great. But if maintenance fees are low for the sake of attracting buyers, and are not adjusted to the true costs, then you could run the risk of a mismanaged reserve fund.
A better sign of value is smart building management. The maintenance fees fill the reserve fund and are used for big repairs, upgrades, etc. If a building is poorly managed, the reserve fund may deplete, at which point the condo board will have to issue “special assessments.”
During the condo search process, however, you may still want to look for buildings with low maintenance fees as a means of maximizing your purchasing power. With a lower all-in monthly maintenance fee, you can allocate more of your monthly budget towards a mortgage payment, thereby increasing the size of the mortgage you can carry. Just be mindful of the building’s true operating costs.
6. Cost of Parking Spot and Locker are included in maintenance fee
Parking spots and lockers are often separately titled properties, which means they have their own maintenance fee attached to them. If your parking spot or locker is separately titled, then you have to pay a separate fee on top of your condo maintenance fee.
Source: via Condos.ca as of Jan 4, 2018. All data is for 2017 unless otherwise noted.
Condos.ca has worked diligently to ensure the accuracy of this information and our calculations including the removal of any small samples and data anomalies that could skew results. However, we cannot guarantee the information with 100% certainty due to factors including but not limited to potential incorrect information entered by listing brokerages or agents on MLS. This information and the views and opinions expressed here are intended for educational purposes only. Condos.ca accepts no liability for the content of this study.