Freehold, Condo, Leasehold or Co-operative

RBC Cuts Theoretical Mortgage Rate

When purchasing a home most buyers only distinguish between freehold and condominium.  This normally doesn’t pose a problem because 98% of land ownership is held in one of these 2 forms.  Some buyers will take title to their new home as leasehold or as a co-operative without knowing the facts and this could spell disaster down the road.

Under leasehold ownership you typically take full ownership of the building, but are only leasing the land.  This may sound like a trailer park model but it holds true for large single family homes in some neighbourhoods.  Often the land belongs to the Crown and because of the zoning they have never sold it to the private sector.  The leases come with a monthly payment for use of the land and can extend for 25 to 100 years.  There is little risk associated with government land leases, but be wary of private leases.  You wouldn’t want to be evicted from your home because the land owner refuses to renew your lease.

The other misunderstood form of ownership is co-operative.  Under a co-operative model an owner owns a fraction of the entire complex and not their specific unit.  Of course the right to occupy and enter your unit is restricted to only you.  The big difference here is your reliance on the other owners to make their mortgage, shared fees and even utility payments.  Should one of the owners become insolvent and fall behind on their obligations then any creditor will take action against the entire complex.  You could be held liable for a fraction of a neighbour’s mortgage or property tax arrears.

Mortgage lenders are cautious about lending on leasehold and co-operative units.  They are considered to be riskier forms of collateral and you bank will require a risk premium.  This premium usually comes in the form of a larger downpayment but it might also mean a higher mortgage rate.

Make sure you know the facts about your next property.  It’s important to know the risks and the benefits before committing yourself to ownership.

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