Pre-Construction Condo Mortgage
August 29, 2018

Buying a new condo

One of the main decisions you will need to make when purchasing a condominium is whether to buy a conventional resale condo or a pre-construction unit. While the aesthetic appeal of buying a new condo unit may be tempting, there are several things to consider before plunging headlong into the purchase.

Down Payment

The financing of a resale condo is very different from that of a pre-construction unit. You can make a down payment of as little as 5 percent towards the purchase price of a resale condo, On the other hand, buyers of pre-construction units are often required to make down payments of at least 20 percent. While that amount may seem high, it’s important to know that the full down payment is broken up into smaller portions, made in what is generally referred to as the deposit structure.

The following is an example of the typical deposit structure:
• $3,000 with the offer
• Balance of 5 percent in thirty days
• 5 percent after ninety days
• 5 percent after six months
• 5 percent at occupancy

The institution that is bankrolling the construction will usually require deposits to be higher at the start of the project. Deposit structures tend to become more flexible as the completion date of the condo draws nearer, and you might be able to lengthen the time period or even decrease your payments by just reviewing the fee structure with the builder.

Cooling Off Period

Your financier will give you a short period of time to reconsider your decision after you make your initial deposit on a pre-construction condo. You can take this “cooling off” period, as it is often referred to, as an opportunity to get your finances in order and make sure you’re fully prepared to advance with the purchase. During this time, you should also have your lawyer examine your Agreement of Purchase and Sale.

Not all provinces offer a cooling off period, and the length of time varies. In Ontario, for example, the cooling off period is 10 days, while in British Columbia it’s 7 days. The cooling off period in most other provinces is at the discretion of the builder.

Closing Costs

Between the time you make an offer and the day you close, you will need to cover several expenses, including legal fees, a home inspection fee, CMHC insurance, land transfer tax, PST on CMHC insurance and more.

In order to cover these costs, experts suggest that you save an additional 1.5 – 4 percent of the purchase price of your homes. That percentage can be even higher when you purchase a pre-construction condo unit.

Some of the additional fees new condo buyers are subject to include:
• Occupancy fees
• Between $50 and $500 for utility hook-up
• Between $200 and $4,000 for development and educational levies
• Between $900 and $1,200 for enrolment fees for New Home Warranty Plan
• Assignment fees of $3,000 (in case you sell before final closing, or flip your unit)

Some of these additional costs may be included in the purchase price of the unit, and they do not apply to every pre-construction purchase. During your cooling off period, ask your lawyer to review the Agreement of Purchase and Sale to establish which extra closing costs you will incur. It is best to retain the services of a real estate lawyer who has had experience with the developer of your building, as based on past experience, he or she will be able to anticipate issues that may come up.

It is best to retain the services of a real estate lawyer who has had experience with the developer of your building, as based on past experience, he or she will be able to anticipate issues that may come up.

Occupancy fees

The developer of the pre-construction condo you’re buying might allow you move into your unit before the remainder of the building is complete. You won’t have to make any mortgage payments until the building is finished, although this marks the start of your occupancy period. The developer will charge you an occupancy fee for each month of the occupancy period until the building is complete and you assume ownership of the unit.

Occupancy periods and their resultant fees occur only in Ontario and are administered by the province’s Condominium Act. The fee structure is devised to allow the builder to only break even on the occupancy fees. Taxes are recalculated at the end of the occupancy period, and any surplus will be refunded to you. Any interest made on the monthly payments is to be paid back to you as well.

The prospect of moving in early and settling into your new building is very attractive, especially since the occupancy fee is likely to be less expensive than the rent you may be currently paying. Most of the amenities of the building will not yet be available, but the elevators will be in service. You should also brace yourself for a lot of noise in and around the building as the builder completes other units. The occupancy period is usually shorter for units on higher floors and for structures being managed by veteran builders.

If you pay for your unit in full before starting your occupancy, you won’t have to pay any fees. The terms of your occupancy must be put into the Agreement of Purchase and Sale before the end of your cooling off period.

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