Mortgages for Pre-Sale Condos

13.07.2015

East Van has a lot of new developments in the works, both currently selling and coming soon (a few coming to mind include Paragon and the Independent on Main St, BOLD on Fraser, The Wohlsein on East 6th and The Oxford on Hastings, among many others). Buying a condo from a Developer is an interesting process that’s different from a typical home purchase. Once the contract is agreed to and signed, the Buyers have an obligation to deliver the full funds to the Developer, and the Developer must deliver the unit to the Buyer. Buyers have to read through the Developer’s Disclosure Statement to understand the intricacies of the contract, understanding that the final product may be different and delayed from what was initially promised. The same goes for getting a mortgage for pre-sale condos.

Mortgages for Pre-Sale Condos

The biggest point to remember when getting mortgage approval for a pre-sale condo is that the mortgage rates and terms are never official until the building is complete, which can be a year or two away. A few things to know:

1. You can get a mortgage pre-approval if you’re buying a pre-sale condo, but at the end of the day it just gives you an indication that you are a good candidate for a mortgage and would be approved. However, mortgages never come into effect until the building is complete which means the interest rates might be different, standard mortgage rules may have changed and your own financial situation may not be the same as when you originally applied for the pre-approval, which can either help or hurt you. For example..

– You may be pre-approved for a mortgage with a 3% interest rate, but if interest rates rise in the next year and a half, your mortgage may be officially approved with a 4% interest rates. Lenders typically don’t hold interest for a number of years, however, you can start inquiring about rates a few months before completion (since lenders may reserve interest rates for you for a certain period of time).

– You may be pre-approved for a mortgage on the unit given standard mortgage rules, but if in the time before completion the CMHC (Canada Mortgage and Housing Corp) decides to change, say, the amortization period to 20 years (rather than 25 years), this would increase your monthly mortgage payments to a number higher than you expected, and you would have to oblige.

– If your financial situation changes while you’re waiting for the building to complete (say, you lost your job, or some investments went sour), you may find that you might not qualify for a mortgage when the building is complete. Unfortunately, this doesn’t give you a reason to cancel the contract, so you’ll have to find another way around it, which could mean having your parents be a guarantor on the mortgage. If your financial situation improves in the meantime, you might be approved for something better than expected.

2. By buying a pre-sale condo, you are agreeing to the price and terms of the purchase with the Developer. One of the biggest risks with doing this is not knowing what the real estate market will be like when the condo is completed. If the real estate market goes up between the time you agree to the contract and the time the condo is finished, then the value of the condo you bought pre-sale is likely worth more than what you paid (this is a good thing!). If the real estate market takes a dive between when you agree to purchase and when the condo is finished, you still owe the Developer the previously agreed to amount (even if the market indicates that the condo is worth less). For example..

– Mortgage lenders will only lend based on the value of the condo at completion. If you agree to buy a unit for $450,000 from a Developer (and for easy math, say you need a 100% mortgage), if the unit is only appraised at $400,000 when the building is complete, the mortgage lenders will only lend you $400,000, which means you will have to come up with the remaining $50,000 to pay the Developers. If the unit is appraised at $500,000 when the building is complete, you’ve effectively “earned” $50,000, which of course, is only realized if you sell the condo.

Talk to a professional Mortgage Broker if you’re interested in buying a pre-sale condo as they may have some interesting and creative solutions to mortgage financing for new developments.

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