Getting a mortgage in Banff – Is it complicated?

By Robin Tuck
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Quick disclaimer

This is a post all about buying real estate in Banff and how the leasing system works with financing. It’s intended to be educational but not relied upon, so if you’re contemplating buying a property in Banff, please consult your lawyer or mortgage broker for more information, or give me a call to discuss in more detail. This blog post does not constitute advice.

Because Banff is located in a national park, purchasing a property here is a little more complicated than purchasing a property anywhere else in the country. Aside from the, much talked about, ‘need to reside’ clause in Banff (which I’ll cover in a different post), there’s a second hurdle that it helps to be aware of. This is to do with the fact that anyone buying in Banff will be purchasing a leasehold interest in their property, rather than a freehold interest.

Leasehold vs. Freehold

If these two terms are new to you, here’s a quick explanation:

Freehold property ownership

Traditional home ownership is freehold ownership. When you buy a ‘freehold’ property, you buy the ownership rights to that land indefinitely (barring some kind of government expropriation). In short, if you’ve bought the property ‘freehold’, you’ve bought the land outright, the title is in your name, and it’s yours forever (or once your mortgage is paid off). You have the right to sell it, lease it, build on it etc.

Leasehold Property Ownership

A leasehold interest in a property is essentially a long term land lease, and a leasehold purchase of the property means you purchase a lease interest in the land for a specified amount of time.

The original owner keeps the ownership of the land, but (in most cases) forfeits their right of possession and ability to do anything with the land while you’re leasing it. As the owner of the leasehold, you generally have the right to sell your interest, develop the property, and sublease it. Much like you may have rented an apartment or a house in the past, this is similar except it’s usually for a much longer period of time and you have a few more ‘ownership’ rights.

Generally speaking, if you bought a leasehold interest in a property, you would still be purchasing the physical building on the land, and would (in most cases) have the same rights as a freehold owner to demolish the house, redevelop, or do whatever you like on the land, subject to any lease conditions and municipal/federal laws and permits.

The major difference with a land lease is that at the end of the agreed upon lease duration, the land would revert to the owner. In Banff’s case, the owner is Parks Canada – or the government.

Again, Generally speaking, a leasehold interest in land is perpetually renewable, and when the amount of time gets low enough, the owner has the right to renew it for a fee (usually nominal). Ultimately this generally means that once you’ve purchased the leasehold right in a property, you can keep the property forever (much like freehold property), as long as you keep renewing your lease.

How long is a typical leasehold interest?

In a typical leasehold interest, a lease is given for a certain amount of time. It’s quite common to see leaseholds given for 99 years or longer, but there are generally no rules that dictate how long this should be. The value of the property is ‘technically’ tied to the amount of time remaining, so as the time runs down towards zero, it becomes worth less (in theory). This is because if a leasehold were to ever reach zero under normal circumstances, the lease would be literally worthless

So technically speaking, the longer the lease duration, the better it is for the buyer. Supposedly the Guinness factory in Ireland has a 999 year lease!

In the case of Parks Canada in Banff, leases are only given for 42 years at a time. This is a lot less than a typical leasehold duration, but ultimately as long as the lease is renewed each time, it doesn’t make a practical difference.

However, the complications with financing arise because of the way Parks Canada renews their leases.

How the rest of the world renews leaseholds

Leasing a property from Parks Canada is fairly straightforward, however there are some slight nuances to the Parks Canada lease that can make it a little more complicated.

As I mentioned, leaseholds technically become worth less as they get closer to 0 years. To mitigate this risk, most leaseholds will renew when there’s still plenty of time remaining on the lease. This is typically when there is around 30 or 40 years remaining.

So when the lease reaches, say, 40 years, the owner gets back in touch with the owner of the land and re-ups their lease back up to, say, 99 years again. Usually, this is a term in the lease, and the owner of the lease will pay a nominal fee to renew. Sometimes this is a few thousand dollars, sometimes it’s a single dollar. 

For Parks Canada, many of the headleases cost a single dollar.

This system is done around the world, and there are usually no issues with this type of ownership. Properties can sell for as much as freehold properties (properties where you own the land) in desirable locations, and for all intents and purposes, there is barely any difference between the two types of ownership. It’s certainly nothing to worry about.

Some owners will typically require lessees to pay a nominal sum each year in rent as part of the leasehold deal. This is sometimes known as a peppercorn rent, because hundreds of years ago, the annual rent would be a single peppercorn!

Here’s where Parks Canada makes things a bit complicated for investors.

Banff lease renewals make things complicated

Whereas typically a leasehold is renewed decades before the time on the lease reaches zero, Parks Canada requires each lease to run to 0 years before it will allow you to renew again. It also only renews each lease for 42 years each time.

On the surface, this shouldn’t be a huge issue; as long as Parks keeps renewing each time it shouldn’t be a problem (side note, Parks not renewing a lease is almost unheard in of Banff aside from when people break the rules). But this method of renewal actually does have consequences when it comes to financing.

The major issue comes when you’re trying to buy a house with, say, less than 30 years left on the lease.

Lease Length vs. Amortisation

Remember, if you will, that typical mortgage amortization periods are now between 25 and 30 years. And now imagine a situation where you’re trying to buy a house with only 10 years remaining on the lease. 

When you go to the bank and ask for a loan for 30 years for a property that ‘in theory’ could be worthless in ten, the computer spits out an error. This is because the bank is uncomfortable giving you a long term loan on a property interest that hypothetically could disappear in 10. 

It means that their asset backed loan could potentially become unsecured in ten years – i.e. if you default on the loan payments, there’s nothing they can take from you to pay off the debt. Banks don’t like that at all.

So you can see how short leases make banks a bit uneasy, and Parks Canada running leases to 0 each time means that, statistically, the majority of houses in Banff have leases of 30 years or less remaining.

So how is it that properties still get sold in Banff, when the vast majority of properties that started with a 42 year lease now have less than 25 or 30 yeasrs left?

How do houses get financed in Banff then?

Well, if you’re lucky, the property you’re looking at might have more than 30 years remaining, in which case, there shouldn’t be any issues, and the banks will have no trouble giving you a mortgage. You may have more lending institutions you can use too.

But in the case where the property has less than 30 years, it’s as simple as choosing a bank that’s familiar with how things operate in Banff, which are fewer and further between. There are definitely plenty of banks that can look past this issue and work with any amount of time on a lease, you’ll just have a smaller pool to choose from. Generally speaking, it’s about 5 or 6 banks that do most of the business in Banff.

Your best bet, if you come across this issue, is to take a look in Banff and see which banks have a presence in the town, and to then speak with a local mortgage advisor or mortgage broker with experience in the Banff market. Do not underestimate the value of using a local professional to get you through the process! A great deal of financing that falls apart, falls apart because the bank has no local experience and cannot navigate the lease issue.

Please also use a local lawyer too, as they are extremely familiar with Park leases and know how to navigate the system efficiently. There are all sorts of complicated issues that the lawyers navigate that are almost uniquely Banff issues, and it will really pay off if you can draw on that local knowledge.

If you need recommendations for mortgage brokers or lawyers, I would be more than happy to help you with a list.

Final thoughts

Hopefully that’s a clear overview of the issues associated with achieving financing in Banff, issues with leaseholds in Banff, and how best to overcome them. In all cases, it sounds challenging, but there are plenty of ways to navigate the issues. The best solution is definitely to consult with local experts and local banks.

If you’re looking at a property in Banff, and would like to chat more about your best course of action, feel free to reach out to me or someone in our office and we’d be more than happy to help!

Lastly, for your information, here’s a bit more about the types of leases that are now issued by Parks Canada. The names I’ve used are just my own terms, used for descriptive purposes, so if you need to know more about your property’s lease, please consult a lawyer.

Types of leaseholds from Parks Canada

Parks Canada actually now has three different types of leases they give out to buyers.

  1. The perennial lease – this type of lease is no longer given out, but older properties may still be leased under this system. You’ve hit the jackpot if the property you’re trying to buy has this lease, because this lease gives the owner the right to renew forever under virtually all circumstances. At some point, Parks Canada realised there was too much freedom with this type of lease, and they stopped giving them out. It’s also worth noting that Parks may now require owners to switch their lease to a different, non-perennial lease if you apply for a development or building permit on the property.
  2. The non-guaranteed lease with compensation – this is what is now typically given out with lease renewals. In essence, it’s exactly the same as the perennial lease, but it includes a clause that Parks Canada may expropriate the land from you if you breach the lease. This may be for letting your property fall into disrepair, or if you try to operate a short term rental business. It’s extremely rare that Parks would ever exercise this option, and it’s only threatened when owners break the rules. This type of lease would compensate the owner in the even of an expropriation.
  3. The non-guaranteed lease with no compensation. This is the exact same as the one with compensation, except this time you get nothing if you break the rules!

Make sure you check with your lawyer during a purchase application and find out which type of lease you’re getting. There is no option to request a different type unfortunately, you get what you’re given!

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