The popularity and success of Location Efficient Mortgages in the United States could be applied to major urban centres like Toronto, says one broker, and lenders north of the border could easily include it as one of their mortgage products.
“Mortgage brokers would run with it in a flash,” say Joe Walsh a broker with Dominion Lending Centres
Bedrock Financial Group. “It would be a tremendous product that lenders could offer.”
Traditionally, mortgage-risk is assessed on income and major debts (like car loans or leases), but other factors like the costs associated with operating a vehicle, like fuel, maintenance and insurance, are not factored in. An LEM favours those who buy in neighbourhoods that are transit-friendly, walkable and close to work – basically, favouring those who are willing to do away with a private automobile.
It is a mortgage that lenders are ready to offer, says Walsh.
“If you talk to different lenders, a lot of them are willing to jump on it now,” he told MortgageBrokerNews.ca. “It’s a great idea, and it is sort of going on now in Toronto’s condo market downtown. People are buying downtown where they work, and they are finding a real savings in not paying $500 or $600 a month for a car.”
Cherise Burda, the director of Ontario Policy, Transportation at the Pembina Institute, sees LEMs as primarily being lender-driven, but probably needing government mortgage policy regulation to ensure a proper assessment of clients.
“I see Location Efficient Mortgages happening in three stages, with lenders taking care of the first two – client education and the mortgage offer itself,” says Burda. “Doing the mortgage assessment profile of the client, the eligibility and requirements (such as the requirements mandated for first-time homebuyers and amortization periods in place for regular mortgages) should come from a government agency.”
Ideally, more people could move downtown – with a focus on first-time buyers especially – as they would more easily qualify for mortgages with a lower debt ratio and have more disposable income.
“If you remove one car from a household, it could increase your capacity of a 25 year mortgage by $200,000, so it just provides more options for homebuyers to live closer to where they work,” says Burda.
A recent Pembina study found more than 80 per cent of residents in the Greater Toronto Area would give up a car and big house in the suburbs in order to live in a transit-friendly and walkable neighbourhood.
Walsh agrees with those findings and believes an LEM offer would go a long way to helping first-time buyers trying to get into the condominium market.
Give “some of the things that have happened over the last year to first-time homebuyers, like the reduction of mortgages from 30 to 25 years and the restrictions placed on insured mortgages with 80 per cent LTVs, anything that can help first-time buyers get into the market is welcome,” says Walsh. “And certainly Location Efficiency Mortgages would do that.”
Walsh doesn’t believe brokers should dispense lifestyle advice, but believes literature prepared for the client outlining it as a mortgage option from the lender would be fantastic.
“Who am I to tell someone how to live their life? Whether they should own a car or not?” asks Walsh. “However, if there was a program or lifestyle model that a lender could show to the client, to use as a marketing tool – heck, a couple sitting in the office wanting a loan are already having that discussion as to what they can afford and what they need to do to make a loan work. But if this was an option, a mortgage product that was available – that would be of benefit to the client.”