The pre-construction condo market is hot, especially in cities like Toronto and Vancouver where hundreds of new projects are going up. Financing a condo pre-construction is a little different than your run-of-the-mill resale home, however, and our friend and top Toronto condo realtor Andrew La Fleur is breaking it down for us.
When buying your first condo you basically have two choices: buy new or buy resale. Both options have their advantages and disadvantages; however, when buying new, you need to understand some of the unique issues surrounding financing your condo purchase. These include:
Unlike buying resale, where you can put down as little as 5% depending on your bank’s requirements, when you buy a new condo from a builder you generally have to put down 20-25%. This may seem daunting for many first time buyers, but the good news is these payments are always broken up into instalments something like this:
- $3000 with the offer
- Balance of 5% in 30 days
- 5% in 90 days
- 5% in 180 days
- 5% at occupancy
TIP: deposit structure is often negotiable. Ask your builder to extend the payments as much as possible or even eliminate some of them altogether.
To see an example of how buying a pre-construction condo works in Toronto, watch the video below.
The 10-Day Cooling off Period
By law in Ontario, everyone who buys a new condo has a 10-day cooling off period during which they can rescind their offer with no penalty. In practice, this is a time where you do 2 things: 1) have your Agreement of Purchase and Sale reviewed by a real estate lawyer, and 2) obtain a mortgage approval for your purchase to satisfy the builder’s requirements.
TIP: many lenders work directly with specific builders to offer 36-month capped mortgage rates which can be useful when buying new. For more information on mortgage approvals for pre-construction condos, go here and here. For some tips on what your lawyer will likely tell you, go here.
When you buy new, you will incur additional closing costs that you do not incur when buying resale. Estimates are hard to make because they vary by developer, but averages are outlined below. These include:
- Development and educational levies ($200-$4000)
- TARION Warranty enrolment fee ($900-$1200)
- Utility hook-up fees ($1000-$2000)
- Assignment fees (if you sell before final closing, or ‘flip’ your unit) ($3000)
- Occupancy fees (see below)
TIP: many of these closing costs can be capped at a maximum figure, or eliminated altogether. It’s important to have Realtor and a lawyer who are experienced in pre-construction condos on your side to help you negotiate these terms with the builder. For an example of what can happen to your closing costs if you don’t have good advice go here.
When buying new, there is usually a short period of time between when you get the keys to your new condo and when you actually own your condo (final registration of the condo building). This is the occupancy period and during this period, you must pay the developer for the right to occupy the suite. The amount of the occupancy fees is more or less equivalent to interest on the amount outstanding on the purchase price. You will only pay occupancy fees until your mortgage payments set it, and will never pay both at the same time. For more information about occupancy fees go here.
TIP: to minimize your occupancy fees, buy as high up into the building as possible. Buildings take occupancy from the ground up, therefore the higher your suite is in the building, the shorter your occupancy period will be.
Final closing is after your occupancy period and this is when your mortgage payments begin and you officially own your unit. You can choose to put down additional funds on your condo if you want to have more than the typical 20-25% that most builders require.
TIP: remember that you can shop around for the best mortgage rate right up until final closing, so even if you obtained an approval during your 10-day cooling off period, you can choose a different lender if you like. That is, your initial pre-approval will satisfy your credit worthiness to the builder, but you can always get another pre-approval from an alternative lender up until you close.
Andrew la Fleur is a Sales Representative with Remax Condos Plus in Toronto. He helps buyers and investors purchase pre-construction condos in Toronto. His blog can be found at TrueCondos.com or follow him on twitter @AndrewLaFleur