For those looking to get a foot onto Toronto’s property ladder, a starter unit like a micro condo may sound like a promising and affordable entry point into homeownership.
Despite their compact design and typically lower prices, getting the financing for these ultra-tiny condo units isn’t always straightforward.
“This isn’t really something that anyone tells you,” Anya Ettinger, a real estate agent with Bosley Real Estate Ltd., told Livabl. “When we’re getting our license, there’s no page that says lenders won’t give a mortgage on a property that’s below 400 square feet, or most lenders won’t.”
Ettinger, who has previously gone viral for her TikToks on Toronto real estate, made a video earlier this year explaining the dilemma between small condo units and the trickiness with mortgaging them, a potential hurdle for first-time buyers looking for affordable housing options in Toronto.
In her TikTok, Ettinger said that most new developments are building smaller suites, in some cases smaller than 400 square feet for a one-bedroom condo. For Toronto buyers who can’t afford a larger unit, a suite on the smaller end of the spectrum would likely fit in their price range. The catch, as Ettinger points out, is that some A-lenders will not offer financing on units under 400 square feet, making it difficult for end-users who require mortgages to buy these small suites.
Ettinger explained to Livabl, that investors tend to have more liquidity to be able to offer a larger down payment or buy a unit in cash compared to first-time homebuyers, meaning that smaller condo units are becoming more suited towards investors rather than end-users.
“So these units aren’t even being geared towards end-users who are the people that we need to make inventory for,” she said in her video. “Investors can go and buy anywhere, but end-users, people that live and work in Toronto that want to buy here, can’t buy these small units because they can’t get a mortgage on them.”
@aserealty we need a larger supply of family-friendly and 2-3 bedroom units NOT 290sq ft studios. #newdevelopment #preconstruction #housingcrisis #realestatetips ♬ Lost – Album Version – Frank Ocean
Ettinger first heard about the micro mortgage predicament from a fellow realtor whose client placed an offer on a small one-bedroom condo. The client had a financing condition in their agreement and later realized that the lender wasn’t going to provide them a mortgage because the unit was too small. Ettinger ran these size challenges by a mortgage broker, who confirmed the same issue.
The challenge with micro condo financing isn’t restricted to the resale segment either. Ettinger explained that the majority of builders will require a letter of intent from an A-lender which states that you are approved for the amount of your purchase of the pre-construction unit.
“That’s a whole other issue because then people go to buy pre-construction thinking ‘I can’t qualify for a mortgage now, but in five years I can,” and then they realize after they’ve signed the papers for the mortgage and they’ve entered their 10-day cooling off period — which is when you have essentially 10 days to back out no questions asked at no cost — but they realize ‘Oh, I can’t actually buy this because I need a pre-approval,’” she said.
Collateral risks make micro condos tougher to mortgage
The reason why some lenders aren’t comfortable with micro condo mortgages is mostly attributed to their newness. Micro condos have only been coming on trend within the last three to five years, according to Elan Weintraub, a mortgage broker, co-founder and director of Mortgage Outlet.
“Lenders [and] banks, they like consistency,” he said. “You’re introducing a new type of housing. No one has ever proven that a 300 square-foot condo is tried-and-true [asset], [in] long-term demand three, five, ten [or] twenty years from now.”
Because of their lack of a long-term track record in the market, Ettinger said that it’s riskier to collateralize against a tiny condo. If there is a downturn in the market, micro condos would likely drop faster in value. During the early days of the COVID-19 pandemic, for instance, the downtown Toronto condo market seized up and smaller condos flooded the market. According to a report by Move Smartly published in November 2020, the most oversupplied condo units in the Toronto market during October that year were units smaller than 600 square feet, a trend that emerged as buyers sought out larger living spaces during the lockdown era.
“Now are the mortgages harder? Absolutely they are. It depends on a few factors,” said Weintraub.
To start, a lender will look at whether the micro unit will be owner-occupied or used as a rental property. As the Canadian Mortgage and Housing Corporation’s (CMHC) mandate is to support housing for Canadians and help them buy homes, they may insure a smaller property to follow this mandate if it’s lived in by the owner, Weintraub said.
“If it’s owner-occupied and it’s really small and it isn’t enough, the lender might not like it, but they’re willing to approve it because the mortgage default insurer is willing to approve it,” said Weintraub.
In addition to the unit’s square footage, the location of the micro unit is important to the context of the mortgage. For instance, a micro condo built across from a university might be assumed as student housing. The definition of a micro condo also varies by location. As these units are generally smaller in size than the accepted spatial norm for their location, what might be considered ‘micro’ in downtown Toronto will be different in Kingston or Hamilton. This characterization varies among lenders too. As Wientraub explains, one mortgage lender may consider a 450 square-foot unit a micro condo while another won’t.
“They might have different policies accordingly, but it’s really the square footage [and] occupancy of owner-occupied versus rental,” he said.
Toronto’s evolving landscape — and buyers — keep micro condos coming
Although COVID-19 had buyers thinking about more living space, micro condos still have an important role to play in the market now and in the post-pandemic future.
Mansoor Kazerouni, global director of buildings at IBI Group, told Livabl that the overall mix of units has shrunk over time. Twenty years ago, one-bedroom suites would be designed in a 600 square-foot unit, whereas a two-bedroom, two-bathroom apartment may now use roughly the same amount of space.
A big contributor for the shrinkage of condos over the years is related to accommodating lifestyle needs beyond the four walls of a unit.
Amenity spaces are a huge part of a high-density residential building’s offering, which can pack in several thousand square feet of facilities in the form of gyms, dining rooms, co-working spaces and art studios. This therefore reduces the demand on exclusive dwelling space. The City of Toronto itself has also evolved to become a more amenity-rich and family- and pet-friendly urban centre over time. Affordability is another part of the equation.
“As we all know in Toronto, these units are price-point driven, whether it’s dollars per square foot or it’s a set price for a studio or a one-bedroom or a two-bedroom,” said Kazerouni. “As the space gets larger, these units become more and more expensive. One way of controlling those costs is to keep these units efficient in size and yet, make provision through common areas for all of those other lifestyle needs that can be shared between the rest of the residents.”
A core principle behind residential development design is to provide a diverse mix of unit types to appeal to a wide audience, Kazerouni explains. Young single people, new graduates and professionals who travel weekly into cities for work contribute to the increasing demand for micro condos and their affordable price point.
Generally, the cost of a 300 square-foot new construction micro condo in Toronto ranges from $455,900 to $666,990 according to data from BuzzBuzzHome, while a 400 square-foot unit averages between $455,900 and $795,990. The smallest condo floorplan in Toronto, Suite 0A at The Goode, has an interior footprint of 263 square feet and starts from $455,900, well below the current benchmark price of $1.25 million for a new GTA condo.
From an architectural design perspective, one of the biggest lessons the pandemic has taught us about micro condos is the importance of communal space management and the use of technology in these areas.
Kazerouni explained that small sizes and spaces become constraining when you’re forced to be contained in that limited space for extended periods of time. Communal condo spaces, which were shut down for safety reasons during waves of COVID-19, were not equipped for such an occurrence. Integrating these spaces with technology, such as apps to notify building management when to sanitize shared areas after use, would help to make communal facilities and micro condos more successful.
“I think we need to think of the role of technology in making these communal spaces more effective, facilitating greater connection, building more community and designing these spaces smarter than we have previously,” said Kazerouni. “And they’re all going to contribute to the success of micro units, in my opinion.”
During the height of the pandemic, city buyers migrated to suburban and rural real estate markets in search of more space, privacy and affordability, a trend commonly referred to as the Urban Exodus. Yet, despite rising real estate prices and record inflation, Canadian homebuyers are showing a greater interest in major cities compared to last year, according to a recent home finance survey by BMO. Kazerouni said that many people who left the city haven’t necessarily cut ties with it forever, an important factor to consider when it comes to micro condos and residents reconnecting with urban living again.
“Of course, affordability has become a greater challenge in this time. Even during COVID, prices have continued to go up. So it goes back to size, because if you’ve got a fixed budget and if the prices have gone up, then your size is going to come down,” he said. “So it behooves us to design units in a manner that facilitates accommodating these people so that they can come back if they choose to.”
Micro condos are here to stay. So will mortgage policies change?
Housing affordability is not getting any easier in the short term. Mortgages for micro condos might be tricky for some buyers to obtain now, but this could evolve over time as tiny units become more desired and established in the market.
Ettinger explains that there was a time when you couldn’t get a mortgage on a unit that was smaller than 600 square feet, but as builders started creating more units of this size, policy eventually changed and lenders started providing financing for units under this threshold. Given that there are thousands of small condos under construction in Toronto that will be completed between now and the next five years — product that will eventually end up on the resale market — more micro condo mortgages will be needed.
On the other hand, Ettinger said that it’s important for there to be planning incentives for builders to make city units that are more family-friendly. As the cost of single-family homes increase, more households are pushed into condos, but it is a challenge to find inventory that is large enough to accommodate families.
“It really needs to be a push from both sides to make sure that we’re getting enough inventory that’s liveable for end-users, but also allowing people to get mortgages if they choose to live in a small unit or once all of that supply hits the resale market,” she said.
Weintraub said that the desire for smaller units ultimately starts at the consumer level, which determines demand and what developers will build. With that, builders need to know that banks are okay to approve mortgages, and banks are coming on board more and more. The more popular micro condos become, and the more proven they are as an asset, the more lenders will feel comfortable with them.
“If you had said to someone seven years ago, ‘Buy a micro condo,’ they’d say ‘You’re crazy. That’s way too small,’” said Weintraub. “But given that prices are so high now, it’s created the demand. There’s consumer demand which leads to builder demand, which ultimately all of these people are calling their banks and mortgage broker and saying ‘I need a mortgage,’ so now there’s demand for the mortgage. So the market is adapting, the lenders are adapting.”
If you are buying a micro condo, Weintraub notes that it’s important to arrange financing before making an offer and understand all of the mortgage dynamics. Some builders also offer an on-site mortgage provider who can explain financing options for new construction units.
Kazerouni anticipates that condo unit sizes are going to stay low, but there will be constant innovation in the marketplace to see how more can be done with less. As affordability and unit size are tied together, micro units can help address part of the housing affordability issue, not just as studio units, but smaller two- and three-bedroom condos as well that can accommodate families.
“We have to look at unit sizes across the board, relative to affordability. We’ve kind of created these definitions of family-sized units and we work towards those guidelines every day, but in some cases, they kind of put people over the affordability threshold. It’s a bit of a dilemma,” said Kazerouni. “Are you shooting for size, or are you shooting to create affordable options? Those two have to be reconciled.”
