Are we there yet?
Lenders take a winding road back to recreational real estate
Are we there yet? Famous words from the backseat as families make the road trip come vacation time.
Since 2008, it has also become a common query of clients seeking financing approval on a ‘recreational’ property. There was a time when the broker or banker knew the twists, turns, pitfalls, roadblocks, and timeline to completion. But no longer is the financing trail a simple or predictable one.
Things changed, not so much with the rate of Canadian mortgage defaults or the quality of applicants. They changed with regard to optics. Politicians and bankers alike were/are under the spotlight to be prudent.
In essence Joe and Mary Canuck’s dream of a cabin on the lake were impacted by Canadian fears of a U.S.-style mortgage crisis.
The net result: money has never been cheaper, but it has never been tougher to access. In particular, financing has become difficult for anything beyond a primary residence, whether an investment property, or a recreational property.
Risk and fear are huge drivers of policy, and the fear for the lenders is that although Canadians may not miss payments on their primary residence (99.65 per cent of us do not), the overwhelming majority of foreclosures which do occur are on that second property. Ergo ‘recreational’ therefore equals increased risk.
With resulting softening, Canadian recreational market has come an opportunity for the buyers. And, finally, the lending climate has also improved.
Mainstream lenders have quietly made internal policy changes with regard to exactly what sort of recreational properties can now be financed – if the buyer is willing to put up more cash and perhaps pay higher lending rates.
Back in play
Properties back in play include:
• Fractional Interests: Fractional interests occur when the fee simple title is divided into interest less than the whole, creating the possibility of multiple owners owning portions of the title, for example quarter-share ownership in resort condominiums.
• Non-conventional Construction: These properties include experimental construction types that do not conform to normal construction guidelines, such as rammed earth, or straw bale construction.
• Co-ownerships: Co-ownership occurs where the purchaser acquires an undivided percentage ownership in the building, which is reflected in the deed that is registered on title along with the exclusive right to occupy a specific unit within the building. (Not to be confused with Co-Ops which are pretty near unable to be financed at all currently.)
• Properties with ownership/occupancy restrictions:
The most prevalent are age-restricted properties in retirement communities.
• Hotel condos: These properties are generally in buildings with a combination of hotel units and residential condo units, where use is restricted. Whistler Phase 2 properties fall into this category.
In all of the above cases there is a common concern on the part of the lender, and arguably it should be a concern of the buyers as well; limited marketability. Although the entry price of unique properties may be more attractive than more conventional offerings, so too will the exit price be lower. Due to this concern, all of the above properties have in common some slightly increased requirements with regard to down payment, i.e. 35 per cent is often the minimum. Rates are typically still market leading ‘A’ type, though.
When a property is not eligible for ‘A’ type mainstream financing, private lenders are often there to fill the void, albeit at higher interest rates. This is often acceptable to a buyer as the seller may adjust the price to absorb the increased financing expense.
However, on some properties, lenders will often not lend even 50 per cent of the value, even at high mortgage rates.
Properties that should give one pause, as they do a lender of any sort;
Properties with specific limitations: Leasehold nearing renewal (such as First Nation lands); onerous Easements and Right of Ways; remote (more than 50 km. away from an urban centre) properties; limited access i.e. boat or float plane access only; lack of services; raw land only without any structures.
Former Grow-Ops: Much more prevalent in outlying rural areas than dense urban areas, these properties remain difficult in the extreme to find any selection of lenders for.
There is a large role played by mortgage insurers such as Canada Mortgage and Housing Corporation in rural financing, so working with a lender willing to lend on the property ‘if mortgage insured’ can bring a solution on a more challenging property much more easily.
Although still not a simple process, the good news is that financing that recreational dream is far more feasible heading into 2014 than it has been over the past few years.
A prudent and certainly a time saving step is to treat financing your recreation like any other business venture and involve a team of professionals. Save the do-it-yourself part for building the new porch at the cabin – as soon as you finally get there.
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