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What is a Location Efficient Mortgage?

29 April 2013

There may be a new type of mortgage product coming to Canada, the location efficient mortgage. And if it’s allowed on the market, it will be good for sellers in major city centres to make top dollar from their home; will give buyers more purchasing power; and will even clear up some of the congestion on busy city streets, such as those found in the GTA. But just what type of mortgage is this?

The location efficient mortgage is a concept that would allow young people and families to afford a mortgage in downtown cores of major cities, and in major urban centres. While prices on properties in these locations are often the highest you’ll find in any other part of the city, the LEM would allow buyers to borrow more money to meet those high prices; and it’s all based on the premise that because they’d be moving to transit-friendly locations, they’d give up driving and owning a car. That would free up money in their daily living and living expenses, and therefore they’d also have more money to pay off that mortgage. Therefore, that loan can afford to be a bit higher.

“The location efficient mortgage idea was based on the premise that you’d actually encourage people to use the public transportation and get away from a lot of the congestion we see with cars in the big cities,” says mortgage broker Calum Ross.

“The idea was, if people could live without cars, so some of their monthly expenses would go down, so it would be a good environment and it would also mean they’d have more disposable income.”

It’s not something that’s been done yet in Canada, but trial runs have been done in four cities in the United States: Seattle, Chicago, Los Angeles, and San Francisco. In 2000 studies were done in these areas taking into consideration criteria such as the type of transit and how often routes ran, as well as area density and distance to the major employers in the area.

From these studies it was determined that buyers could afford $12,000 to $50,000 more than their current credit and living expenses would give them. The study was only short-term however, and no long-term results or studies were done based on those results.

A study has been done by the Cherise Burda and the Pembina Institute however, trying to determine how eager Toronto buyers would be to live closer to core areas. That survey, known as the Pembina Study, showed that over 80 per cent of GTA residents would gladly give up a car in order to live closer to the major centres.

And of course, not only does this help buyers (and sellers trying to get top dollar for their properties) but it will also clear up some of the traffic in these major city areas. Because when people are taking more transit, there are fewer of them on the roads and major highways.

“So that we then have walkable communities along the transit lines, options to take transit. That will help congestion. If we don’t deal with sprawl then things will get worse,” says Ms. Burda.

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