Location, location, location
When lenders evaluate a loan application, the goal is to minimize risk and avoid taking on a mortgage that could implode and leave the lender in possession of a home it needs to liquidate.
While it’s easier to sell foreclosed properties in larger markets because of reliable demand, smaller communities typically have less-robust markets. Foreclosing on a home in rural Alberta or northern British Columbia, for example, might mean a lender holds onto a property for months or even years before it sells. That’s not the business lenders want to be in.
Mortgage brokers often say lenders prefer to deal with properties within 50 kilometres of significant population centres. Once a transaction starts pushing those limits, it can get much more complex.
“When [buyers] want rural or another province or something a little bit unusual, from our point of view it’s at least 50% more work,” says Graeme Moss of Verico Fair Mortgage Solutions in Hamilton, Ont. “Each one is very unique, so we’ll look at a million things. It’s like a puzzle.”
The complexity of some small-town mortgages means buyers shouldn’t expect to be whisked through the process.
Two of Moss’ recent applications – one involving a farm in Ontario, the other a home in Prince Edward Island – required multiple meetings with lenders from across the country before funding was cobbled together.
Watch out for rural purchases
The situation gets even dicier if you’re planning on buying rural property.
“That is an absolute swine to get done,” Moss says. “Some of the lenders have rules. They will not do any agriculture. They won’t touch it with a ten-foot pole.”
In Saskatchewan, where iSask Mortgages broker Chris Kolinski has been fielding an increased number of calls from Ontarians, borrowers may have even more difficulty getting lenders to approve their mortgages.
“One of the biggest challenges in Saskatchewan is financing property in rural areas,” Kolinski says. “Our foreclosure laws are tighter here than in other provinces, so lenders would be taking on more risk.”
Both Kolinski and Moss say a rural buyer’s saving grace may be found in the nation’s mortgage insurers.
“If Canada Mortgage and Housing Corporation, Sagen, or Canada Guaranty will insure the property, then we have a lot of lenders that will support it,” Kolinski says. “If it isn't insured, a rural property would most likely have to be financed by one of the Big Five banks or a local credit union that is familiar with the area.”
Don’t expect help from private lenders
When Canada’s mainstream lenders turn down a mortgage application, buyers often find themselves weighing the pros and cons of taking out a short-term loan with either a private or semi-regulated B lender.
In the case of rural properties, Kolinski says both options may be another dead end.
“If we are needing B or private-lending solutions, it becomes almost impossible to fund a mortgage in a rural area in Saskatchewan,” he says. “We are extremely limited on which B and private lenders will lend on a rural property here. The lenders that would consider something rural really want the property to be located in a major community or near any large employment opportunities, like a potash mine.”
Kolinski says some of the properties lenders recently passed on weren’t even that rural, including one in a community of roughly 6,000 people. In Saskatchewan, that’s a city, but in the eyes of a lender, it’s a town with too few buyers to take a foreclosed home off their hands.
“If that property was located in Saskatoon or Regina, this would have been much easier to do,” he says. “Not only would this have been approved through that lender, but we would have had access to 10-plus more lenders to shop it around to.”
And what happens when a borrower is shut out?
“In this client's case, we just coached them on what we believe needs to happen so they are in a better position to buy in the future,” Kolinski says.
Are lenders relaxing geographic standards?
The increase in rural- and small-town real estate activity kicked off by the COVID-19 pandemic appears to be affecting lenders’ willingness to approve deals in communities they previously would have avoided.
While he won’t say lending standards have relaxed, Community Trust director of national sales Grant Armstrong in Mississauga, Ont., says lenders constantly review market demand.
“Lenders will review a market, and determine if the current demand meets their risk appetite and what is the likelihood it will remain at that level of demand or increase,” he says.
That’s the question facing most lenders today: Will demand for rural and remote properties stay strong once the pandemic is over, or will it recede as employers begin calling employees back to work in urban centres?
For now, Moss says lenders seem open to home loans in remote, small towns.
“I don’t think it’s as unusual as it used to be,” he says. “It used to be if you had rural stuff, the lender would look at you like, ‘You want us to do that?’”
Housing’s not red hot everywhere
Don't assume you will get approved for a mortgage in a small community if you were pre-approved for something in a major centre, Kolinski says.
“Make sure to tell your lender or broker if you are considering a small town or acreage-style purchase,” he adds.
Armstrong says buyers should also consider how long they will be holding onto their new homes.
“If a property is being purchased for the short-term, be aware of the average days on market. If the intention is to move in and sell in the short term,” he says, “you could be holding a property longer than you expect.”
But the most important calculation to make when purchasing property in a smaller, possibly very different community from the one you’re accustomed to, is whether you’ll be happy there.
“Buy where you want to live,” Armstrong says. “Make sure what works for you and your family is absolutely number one.”