How do I get a mortgage on a pre-construction condo? When do I start the process, who do I go to? These are all very typical questions we receive on an extremely regular basis – so I thought a frequently-asked-financing post was warranted.
Dull as it may be, financing on pre-construction condos is the very stilts that this entire industry is founded on. Leveraging financed assets is how the rich get richer – and in Toronto, it’s more profitable than ever before. We as the consumers pay a 20% deposit to own the rights to 100% of an imminent asset.
As such, we enjoy the profits of capital gains resultant of leveraging the property market five-to-one. Similarly, condominium developers take our 15-25% deposit, in addition to some funding from the banks, to fund construction and ultimately deliver on the condo or asset.
We take occupancy, and our mortgage starts in addition to the realized capital gain (if the market went the right way, of course).
I’m lucky enough to witness first-hand many of our clients secure financial freedom every single day through making smart investments in the pre-construction sector of Toronto, see our “testimony” below for proof.
Now, unfortunately, I occasionally see some investors who have also stretched themselves too thin. It’s important to realize that the bank will only give you so much debt, even good debt, relative to your income.
Your investments in pre-construction need to be timed accordingly to your debt-to-service ratio, or you can find yourself in a tricky spot with properties you cannot afford to close on – or banks that refuse to honor their mortgage pre-approvals.
Luckily, pre-construction condos in Toronto have been in a seller’s market for 3 straight years now – so liquidating at a profit is easy enough. As a rule of thumb, you want to ere on the side of caution and play the long game.
FAQs on Pre-Construction Condo Mortgages
Here are the top 9 frequently asked questions about mortgages when buying a pre-construction condominium.
1. Do I need a mortgage pre-approval to buy a new condo?
Yes. For the most part, condo builders will require a mortgage pre-approval from you for your contract to be in good standing.
This is a safety measure put in place to help curb speculative investment from over-leveraged parties and to ensure that the purchasers can afford to close on the property when the time comes, rather than to default.
There are some exceptions to this rule, occasionally when a building has hit the 80% sold mark and funded construction, or when the building is very close to occupancy, the builder may loosen up on financing restrictions.
Condo builders in Toronto will generally want this mortgage pre-approval in 30-90 days after you purchase a new condo.
However, it is in your best interest to get the pre-approval during your 10-day cooling period so that if it becomes clear, you will have troubles with financing, and you still have the option to back out of the purchase with no obligations.
It’ll also give you some peace of mind that you didn’t stretch yourself for the purchase, and may even give you an option to get a commitment letter to secure today’s interest rate for a closing a couple of years out.
2. What factors affect my eligibility to get a mortgage?
There are a lot of factors that can affect not only your financing eligibility but also the terms of your loans, namely interest rate. It’s important to know these factors ahead of time so you can position yourself accordingly to get triple-A rates if possible.
a. Credit Score
Your credit rating will come in to play. An antiquated metric, surely, but still one primarily used by banks. A ton of factors goes into what your credit rating is.
An excellent score is anywhere above 700, anything below and you may find troubles getting financing with one of the Big-5 Banks in Canada. Below 700 credit rating is still plenty enough for a B-Lender, so don’t count yourself out if you have less than excellent credit.
b. Income to Debt
Income to debt is just a ratio of putting your debt service as a percentage compared to your income. For a simplified example, if you earn $10,000 per month and you have a $1000 school loan payment and a $2000 mortgage payment, you are at 30%. This means that of your monthly income, 30% covers your debt repayments.
Every bank is different, speaking in generalities, you’ll have trouble attaining financing if the mortgage loan will put you above 40% total debt to service. For investment units, banks will apply 50% of the rental income you receive against your debt repayment so that the qualification metrics may be much lower.
This is one reason why it’s incredibly advantageous to have a tenant secured before the final closing on your investment condo before your mortgage starting.
c. Self Employment or not enough income history
As a self-employed individual, it is notably more difficult to secure a mortgage loan. The nature of being self-employed is that income fluctuates yearly, so the standard is for banks to use the previous 2 years notice of assessments and average them out as your “annual income” figure to use in the TDS calculations.
This raises issues if your business is recently doing very well, as they won’t use the current year’s income numbers. Furthermore, if you haven’t been employed very long at your income level, the bank won’t look at it as a stable source of income.
3. Do banks offer Rate Guarantees for a year or longer?
If you are purchasing a pre-construction condo that is closing 3+ years out, it is doubtful for the bank to honor the interest rate quoted on your mortgage pre-approval. In these cases, I typically tell clients to get the MPA from the easiest source (usually the bank you’ve dealt with longest) and re-visit a broker at the time of closing to shop around alternative lenders.
If you are purchasing a condo that will be ready in 2 years or less, seek a commitment letter if you want the security of a rate guarantee. Many brokers and banks will be able to provide you with a commitment letter that will lock in today’s interest rate if the development is already under construction and is going to be completed within a year or so.
This may help to give you some peace of mind and security if you’re skeptical about where rates are headed – however, keep in mind, historically, purchasers in Toronto have done better with Variable Rate Mortgages.
4. When does the mortgage start on a pre-construction unit?
Your mortgage loan will start on final closing, not on occupancy. Generally, you’ll take occupancy 3 to 6 months before final closing. Final closing is when the condo building is officially registered with the city and when you’ll receive the title to your unit.
Instead of your mortgage, you’ll have to pay the builder occupancy fees from the time of occupancy to final closing. On final closing, you’ll receive the title to your unit and your mortgage will start. I advise clients to begin the process 3 months ahead of time to give plenty of room for hiccups.
5. How are occupancy fees calculated on new condominiums?
I’ve heard occupancy fees referred to in a negative light many, many times, dubbed “rent to the builder” or “phantom rent”. It’s often misconstrued, and some people even use it as a reason to avoid pre-construction.
It’s actually quite simple, and it is less carry cost than you’ll have when your mortgage loan starts, so during this time you’re seeing appreciation in the market with even less overhead. The fees are made up of 3 things:
- Condo Maintenance Fees
- Property Tax
- Interest on the capital borrowed based on the BoC rate (for example, if you put 20% Down, it’ll be the BoC interest rate on the remaining 80%)
To simplify even further, think of it like this: it’s the same expenses as you’ll have on closing with your mortgage, minus the principal payment portion. If the idea of paying down principal is essential to you, put aside the principal payment portion that you’re saving every month during the occupancy stage and use the lump sum to pay down your mortgage loan once you close on the unit.
6. Does a mortgage pre-approval guarantee financing?
No, it does not. A mortgage pre-approval is typically valid for a period of 90-120 days at maximum, at which point terms would need to be re-negotiated. 
Why ask for it then? It’s simply the builders way of hedging their risk and stopping speculative investors. When you get closer to the time of occupancy or closing, you’ll want to start reaching out to your bank or broker to get a firm commitment.
7. What are Micro Condos? Will banks mortgage them?
Micro units are any condo units that are under 500 square feet in internal size. Most studios and some of the smaller 1 bedroom units fall in this category. The big-5 bank generally don’t like to mortgage anything under 500 sq.ft, so you may have to turn to alternative lenders to get this done. 
Personally, I think this will change over time. As our market continues to appreciate, the affordability of 350-450 sq.ft studios is increasingly attractive to first-time buyers and investors alike, but, for the time being, you may asked to put down more than 20% or pay higher rates.
8. Should I use my bank or go to a mortgage broker?
A broker. Go to a broker. Don’t commit to your bank before you shop around other offers. Every bank is different, and every bank has different qualifying metrics. You may, and often do, get a better rate by using a broker and going with a different bank. Keep in mind a broker will generally work much harder for your commission than the bank you’ve been banking at for years, who thinks they’ve already got your deal.
9. Can I pull equity out of my condo to invest in more condos?
Absolutely. Instead of refinancing, I’d typically recommend going the route of a home equity line of credit (heloc) which will allow you to get a line of credit based on the capital appreciation of your home.
For example, if you put 20% down on a $400k pre-construction condo, and at the time of closing its assessed value is $500k, you can get a line of credit for the $100k in capital gain and use that however you want (more pre-construction condos, of course).
Any questions? Give me a shout or leave a comment 🙂