This Article will cover mortgage financing for newly built, 100% completed properties purchased from a 3rd party builder/real estate developer. We commonly refer to these properties and their mortgages as pre-construction properties/mortgages since you purchase the home from plans before its built. Pre-construction mortgages are not construction mortgages because you are not borrowing money to carry out construction; you are purchasing a completed property from a developer, who obtained their own construction mortgage to build the property. We will be covering construction mortgages for self-build and/or contractor-built properties in a different article.
There is a lot of misunderstanding about pre-construction mortgages, and hopefully, this article will help you to understand the risks, mortgage financing, etc., associated with purchasing a pre-construction property.
It is in your best interest to be pre-qualified before you purchase any property, but because of the many additional factors involved with pre-construction mortgages, we believe it is even more important to complete a pre-qualification for a pre-construction property purchase. Give yourself the best assurance that you will have a mortgage on the closing date.
Besides the necessity to protect yourself, most developers will either insist that you prove in writing that you have a mortgage pre-approval or approval when you firm up your purchase of the pre-construction property. You should be pre-qualified for a mortgage before submitting an offer to purchase the property, but developers will either grant you a condition of finance [COF] or a cooling-off period of approximately 10 days for you to present them with a mortgage pre-approval/approval.
Pre-approvals are never a guarantee of mortgage financing. At best, pre-approvals are valid for 90-120 days and are typically not underwritten by lenders. Mortgage approvals are also only valid for 90-120 days. This means that you will have to apply again for your final mortgage approval 90-120 days before the closing date. Since it is not unusual for pre-construction projects to take years to complete, it is important that you remain very vigilant about the factors that can affect your final mortgage application:
- Income: Maintain the same income, employment status, etc.
- Credit: Keep your credit score above 720, don’t miss payments, keep your balances below 35% of the credit limits, etc.
- Liabilities: Keep your liabilities as low as possible and no higher than the time you completed your pre-qualification.
- Mortgage Qualification: Currently, your mortgage eligibility is assessed using a higher stress test interest rate and not the actual or contractual interest rate. The stress test interest rate is set by the government and can change at any time without prior warning, which means you may not qualify for a mortgage on the closing date if the stress test rate increases too much prior to the closing date. We highly recommend that you know your maximum mortgage eligibility stress test rate.
Some lenders do offer rate guarantees for longer than the usual 90-120 days, but the further out the closing date, the higher the mortgage rate will be. It is very important to note that even though a lender may have issued you with a mortgage approval, it still reserves the right to check credit, verify income, re-qualify the mortgage, etc., at any time before the closing date. Thus, it is always important to remain vigilant about your mortgage eligibility factors.
This is a very important point since condos typically have two important and different dates; the occupancy date and the closing date. The closing and occupancy dates for freehold and condo-townhouse properties are usually the same. Your mortgage for the new property will start on the closing date. The closing date is the date on which the property is completed, the property is registered with the Land Registry Office, and the title of ownership is transferred to your name.
For condos, the occupancy and closing dates are usually different. Here is some information about the occupation date and more:
- Your solicitor should notify you in writing of your occupation date. It is important that you provide your mortgage broker with a copy of your occupation date notice as soon as you receive it.
- The occupancy date is the date on which you occupy [move into] the condo, but you are not the legal owner yet.
- The occupancy period is the time period from the occupancy date until the closing date.
- During the occupancy period, you pay occupancy rent to the real estate developer.
- The occupancy date for condos on higher floors is usually before the condos on lower floors.
- The occupancy period can be from 3 to 8 months or even longer.
There is no set occupancy rent amount, so consult your purchase agreement and solicitor for details. However, in general, your occupancy rent should be the sum of the condo fees, property taxes and the interest of the capital borrowed. This means that your occupancy rent should be lower than your eventual mortgage payment.
For a freehold property, your closing date will be stated on your purchase agreement, but the closing date can change due to construction delays, etc. Your solicitor should notify you in writing of your final closing date. Unlike freehold properties, determining the closing date for condos is not that simple. The closing date is dependent on many factors, including construction timelines, property registration, etc., and as we mentioned above, the occupancy period can take a long time. It is really important that you stay in regular contact with your solicitor so that you can provide your mortgage broker with the solicitor’s final closing letter as soon as you receive it. Remember, to protect you best; your mortgage broker needs at least 30 days’ notice to close your mortgage.
Because your mortgage only starts on the closing date, you don’t technically need a mortgage approval on the occupation date. However, your developer may insist that you provide proof of a mortgage approval on the occupation date. Make sure you understand your developer’s requirements because your mortgage broker will need at least 10 banking days to gather supporting documents from you, apply for the mortgage and review the mortgage with you before presenting the developer with a mortgage approval.
Your minimum deposit amount varies between projects, property types and developers, and it is usually paid over a period of time as specified in your purchase agreement. The deposit amount usually becomes part of your mortgage down payment, but the deposit amount does not have to be equal to the down payment amount. Your minimum down payment is determined by mortgage rules and not by the deposit your developer required. For example, your developer may have required a 20% deposit [$120,000] for a property with a $600,000 purchase price at the time of the purchase, but the minimum legal down payment for the same owner-occupied property is $35,000. If you are eligible for the minimum down payment, then you don’t have to apply the entire deposit to the down payment.
The equity in your pre-construction property is the difference between the property’s market value [appraised value] on the closing date minus the property’s purchase price. [For explanation purposes, exclude your down payment from the equity]. It is important to note that Canadian mortgage lenders will lend only on the lower of the property’s purchase price and the lender’s appraised value. Thus:
- If the property has increased in value by the closing date, the lender will lend based on the lower purchase price, and you will not have access to the increased equity unless you close the purchase mortgage on the closing date and then refinance the mortgage after the closing date or you sell the property.
- If the property’s value has decreased, the lender will lend based on the property’s lower appraised value, and you may have to provide an additional down payment to qualify for the mortgage.
Selling your property before its closing date is called an assignment sale. Not only is this a risky practice, but it is also discouraged by the government. Very few lenders will provide mortgage financing for assignment sales, and if they do, mortgage eligibility is based on specific circumstances.
The closing costs for pre-construction properties are subject to additional costs based on your property type, the property’s occupation, the real estate developer, government requirements, etc. Some of these additional costs can be utility connection fees, paving costs, tree planting fees, HST, Tarion fees, etc. Check your purchase agreement for details and ask your solicitor for a copy of the Statement of Adjustments. The Statement of Adjustments provides you with a detailed list of additional closing costs.
Reach out to us for help. We help many clients with their pre-construction mortgage needs and would love to help your new build become a reality.
- For information purposes only
- Based on estimates
- Subject to approved credit and lender final approval.
- Subject to terms & conditions
- Requirements, rules, guidelines, information, rates, etc., can change at any time, without prior notice.