Frequently asked questions
Thinking of Borrowing? What you need to know.
Yes, a condo can borrow, provided that the majority of unit owners vote in favour of doing so.
A condo will typically qualify for a loan provided that it operates in substantial compliance with the Condominium Act and that the amount of the loan is modest in comparison to the sum of the values of all units in the condo.
No. There are no encumbrances registered against any individual unit.
The loan will not affect mortgages on individual units.
No. The loan is to the condominium corporation. Individual unit owners will not be asked to provide financial disclosure details.
The loan is to the condominium corporation, however, ‘opt outs’ may be permitted. This allows those owners who prefer to pay the assessment up front the opportunity to do so, and allows those unit owners who do not have such capacity.
The condo corporation provides security to the lender by way of general security agreement and a condominium loan agreement.
Condominium loans are a commercial finance product, not secured by a mortgage and charge. Typically, commercial
finance interest rates are higher than interest rates for mortgages on owner-occupied homes.
A proportionate amount of the condominium corporation loan payment is typically added to the common element fee of each individual unit owner. The condominium corporation make one monthly payment to Morrison Financial.
If a unit owner does not pay its common element fee, the corporation follows an established legal process that can ultimately result in a lien registered on title to the unit in favor of the corporation. The monthly payments collected by Morrison Financial from the corporation will remain unchanged, regardless of any arrears from individual owners.
This will be negotiated between you and the buyer. The buyer may be willing to take up the payments, but if they are not, you may have to use some of the equity from the sale to pay off your share. This agreement with the potential buyers will be negotiated by you and your real estate agent. Penalty charges will apply to any loan prepayment amounts.
What happens at the end of your loan term?
The condo corporation’s end-of-term options are to (1) renew the loan at the then remaining principal balance and financial market conditions, (2) pay down a portion of the loan and renew the remaining principal balance at then current market conditions, or (3) pay out the remaining principal balance on the loan.
Morrison Financial will reach out to the corporation approximately 60 days in advance of the renewal date to start discussing options.
The loan is to the condo corporation and its directors may permit unit owners to “opt out” or pre-pay their proportionate share of the loan.
This process is managed internally by the condominium board of directors or its property manager or other advisor who collect amounts from unit owners. One cheque for the aggregate amount of the paydown is remitted to the lender on behalf of condo corporation.
Prepayment of the loan will be according to the CondoCorp Term Financing Agreement.
No there is not a minimum principal amount that must be renewed at time of renewal.
Prior to renewal, Morrison Financial will work with the Borrower to determine the optimal term and amortization of the loan. The term is typically up to five years and the amortization period will be an amount less than or equal to the remaining amortization on the loan at time of renewal.
The interest rate at time of renewal will be set based upon the loan market conditions in effect at that time.
Are you financing a capital repair or replacement project?
A construction loan is used to finance capital projects which are completed over time and payments are advanced periodically based upon work completed. During this time, interest is charged on amounts outstanding and principal payments only commence after the project is complete.
It is recommended that an engineer or other qualified person be engaged to authorize payments during the construction period, however, for projects with costs less than $750,000 other arrangements can be made if warranted by the circumstances. Larger or more complicated projects will require increased monitoring by experts.
An engineer or other qualified person is able to evaluate the quality and quantity of work performed, assure that payment is only made once satisfactory work is in place, and that sufficient budget remains to complete the project.
Prior to each advance of funds during the project, the engineer or other qualified person certifies that the work appurtenant to the request has been completed in a satisfactory manner. Morrison Financial must review and accept this certification prior to advancing funds for the work.
Loan amounts are advanced periodically (often monthly) for work that is completed in the project. Under some circumstances, where the project is simple or over a shorter term, the lender may advance all amounts at once.
During construction, the interest rate is variable and fluctuates based upon chartered banks’ prime rate. Following construction, the loan converts to a term loan when the interest rate is fixed based upon then current Government of Canada Bond Rates, or other fixed term instrument.
The length of time that the interest rate is fixed for is referred to as the Term of the loan. The borrower and the lender will discuss options, but usually loan terms are fixed for up to 5 years, sometimes up to 10 years.
The amount of time it takes to repay a loan is referred to as its amortization period. The amortization period must not exceed the useful life of the asset or work being financed and in no case may it be longer than 25 years.
A commitment fee that is charged by the lender is used to offset the administrative cost that is associated with reviewing your loan opportunity.
Understanding condominium statute
In Ontario, a condo is land or a building that is a not-for-profit corporation constituted under the Condominium Act, 1998, which is a statute, or law that provides a set of rules under which a condo is governed.
Condos are governed by a board of directors comprised of at least three persons who are duly elected by owners of the units in the condo. The board of directors have a duty of standard of care which means they must act honestly and in good faith and exercise care, diligence, and apply skills of a prudent person. They must rely on reports and opinions of experts when necessary.
A condominium loan may be used for funding of capital repair and replacement project, additions or alterations (where duly authorized), purchases from the developer, i.e., HVAC system, guest suite, reserve fund replenishment, where in a deficit or such other as permitted under the act.
In cases where the board of directors of a condo is unable to exercise this duty of standard of care, a Government of Ontario court may appoint an administrator to control its governance.
Common elements of a condo are the parts of a condo building other than those that comprise a condo unit.
A Reserve Fund is money put aside by a condo corporation to pay for major repairs and replacements to common elements.
A Reserve Fund Study is a report prepared by a qualified person that identifies major repairs and replacements that are required to be undertaken to the condo common elements and those that will be reasonably expected in the future.
Yes, the Condominium Act requires that a study be undertaken with the first year of the registration of its declaration and each three years thereafter in Ontario and every five years in Alberta.
The funding plan is a cash flow that commences with the balance in the reserve fund. It may be increased by periodic contributions to the fund by way of monthly assessments, special assessments and loans. It is decreased by spending on major repairs and replacements. It must be adequate to carry out repairs as indicated in the Reserve Fund Study.
A plan for funding major repairs and replacements must be created within 120 days following the receipt of the Reserve Fund Study.
It is the responsibility of the board of directors to prepare the funding plan who often commission its preparation to the party who prepares the Reserve Fund Study.
It is the condo board of directors who make this decision as part of their duty of standard of care. They rely on the Reserve Fund Study and other expert third party advice and are not required to seek consent from unit owners.
Undertaking substantial additions, alterations or improvements to a condo’s common elements is a decision of the condo unit owners. The board of directors must put a motion to the unit owners of the condo, and for it to pass it must receive votes in favour of the motion by a majority of not less than 2/3 of all unit owners.
The fund must be made adequate by increasing monthly condo fees and/or by way of one or more special assessments. Alternatively, the condo corporation may borrow funds by way of a loan which must be repaid over a fixed term.
Still have questions?
Condominium board directors and unit owners will have many questions. Read more of our frequently asked questions or reach out today to speak with a finance professional.