What to know about getting a mortgage when buying a co-op

Not every property in Canada is a standalone house or a condo. There are thousands of housing co-ops across the country.

Co-ops tend to be found in older apartment buildings or townhouse developments, and they work a lot like condos. They are not-for-profit corporations that are solely owned by the members of the co-op. Decisions are made democratically by members, with a simple majority winning any votes.

The co-op has a few obligations to its members. Members pay a monthly fee in exchange for services like certain utilities, maintenance, and upkeep of common areas. The co-op must do these things for its members. Members are required to keep their property maintained and to pay any co-op fees or property taxes owed.

The real difference between buying a condo and buying a co-op is the ownership structure. Co-op “owners” don’t actually get ownership of their property. What they’re buying is a deed that gives them the right to live in that property for as long as the co-op exists. Instead of title to the property, owners get shares in the cooperative.

How this affects getting a mortgage

This ownership situation affects financing in a big way. Most lenders respond with a very quick “no” whenever an applicant looking to buy a co-op property submits an application. Since the lender can’t physically get a mortgage for a property the owner doesn’t own, they’re not interested in even looking at the deal.

There are ways around this, of course. Many of the larger co-ops in major centers have approved lenders that are interested in financing these unique ownership situations. But many require huge down payments (anywhere from 25% to 50% is common), and borrowers don’t always have access to the best mortgage rates.

If the co-op doesn’t have an approved lenders list, getting a mortgage when buying a co-op becomes even more tricky. If 95% of traditional lenders won’t even consider a co-op, a borrower is forced to go to private lenders and the huge interest rates they charge.

Another thing for borrowers to consider is resale value. One reason many people are attracted to buying a co-op is the sticker price, which can be anywhere from 10% to 50% less than a comparable condo or freehold property. But these people need to realize there’s little hope of that property ever coming back to its true market value. It’ll always trade at a discount because it’s a co-op.

And remember, co-op boards are often stricter than condo boards. This limits the pool of potential buyers significantly. If someone buying a co-op needs a huge down payment and must go through a thorough vetting process to get approved, most people simply won’t bother. They’ll buy a condo instead.

Should you do it?

Co-ops make sense for certain people. For people downsizing, an onerous down payment isn’t a big deal. And others like that they have an active role in managing the property.

But considering the financing difficulties and the restrictions of ownership, most folks reading this should probably just stick to owning condos. When it’s time to sell, you don’t want to reduce your pool of buyers.