Pre-construction, from deposit to final closing

Buying pre-construction is two transactions separated by years. You agree a price and pay deposits now. You arrange the actual mortgage much later, against a property that does not exist yet, under whatever rules and whatever market apply on the day it completes.

Most of what goes wrong happens in that gap. Not because buyers do anything careless, but because the two halves are treated as one decision when they are nothing of the sort.

The builder’s approval is not a mortgage

When you sign, the builder will usually want a letter showing you can afford the purchase. Some have an arrangement with a particular lender. That letter satisfies the builder’s condition and nothing more.

It is not a mortgage commitment. It does not hold a rate. It does not survive a change in your income, your debts or lending rules. The real application happens near completion, and it is assessed from scratch, on the day, against the guidelines in force then.

Treat the signing-day letter as a formality you have cleared, not a financing arrangement you now have in place.

Deposits are not a down payment

Deposits are paid to the builder in instalments against milestones, commonly reaching fifteen or twenty percent of the price over the first year or two. They are your money in the deal, and they count towards what you owe at closing, but they are gone from your accounts long before a lender looks at anything.

That matters for two reasons. Your savings are committed while your circumstances can still change, and if you need more cash at closing — which is the usual outcome of a low appraisal — the money you might have used is already with the builder.

Interim occupancy: living there before you own it

Condominiums have a stage most buyers do not expect. Once your unit is ready but the building is not yet registered, you move in and start paying an occupancy fee. You do not own the unit during this period. Title is still the builder’s.

The occupancy fee is made up of three parts:

• Interest on the balance of the purchase price you have not yet paid
• An estimate of the monthly property tax
• The common expenses for your unit

This is not a mortgage payment. None of it reduces what you owe. It is closer to rent that you pay on a home you have already committed to buy, and it can run for months. On a large project it can run considerably longer.

Budget for it as a separate cost, not as an early start on your mortgage payments.

Final closing is where the financing really happens

When the building registers, title transfers to you, your mortgage funds, and the balance goes to the builder. This is the moment the lender assesses everything properly, and it is where the problems surface.

The appraisal happens now, against today’s market. You agreed the price years ago. The lender lends against the lower of the purchase price and the current appraised value. If values have not kept up with what you agreed, the difference is yours to cover in cash, at short notice. This is the single most common pre-construction financing problem locally, and the appraisal article covers the options.

Your file is re-checked. Income, employment, credit and debts are all reassessed. A job change, a car loan, a business that had a slow year, a rising credit card balance — any of these can change the answer between signing and closing, and the lender is looking at the version of you that exists on closing day.

The lending rules may have moved. Qualifying criteria are not fixed. The rules that applied when you signed are not necessarily the rules you are measured against years later.

The closing costs specific to a new build

On top of the usual legal fees and land transfer tax — two land transfer taxes in Toronto — a pre-construction purchase carries costs a resale does not:

• Development and levy charges, passed through by the builder. Your agreement may cap these. If it does not, they can be a genuinely unpleasant surprise.
• Tarion enrolment, the Ontario new home warranty fee.
• Utility connection and meter installation charges.
• HST. For a home you will live in, the rebate is normally assigned to the builder and the price you see already reflects it. If you are buying to rent out, the position is different: you pay the HST at closing and claim the rental rebate afterwards, which means finding that money first.
• Occupancy fees, if you take occupancy before registration.

Ask your lawyer to price all of these from the agreement before closing approaches, not after.

Assignments

Selling your contract before closing — an assignment — is its own transaction, governed by what the builder’s agreement permits. Many restrict it, charge a fee for it, or prohibit it until a certain stage. Assignment purchases are also harder to finance than either a resale or a standard pre-construction closing, because fewer lenders will take them and the ones that do look closely at how the price was arrived at.

If an assignment is part of your plan, confirm it is allowed before you need it to be.

What actually protects you

• Get the financing reviewed early, not in the final weeks. Closing dates move, but they rarely move far enough to fix a problem found late.
• Keep your debts flat between signing and closing. A new car loan can cost you the approval on a home you have already paid deposits on.
• Hold a cash reserve beyond the deposits. It is the only thing that solves an appraisal shortfall on a firm closing date.
• Read the agreement for the caps. Development levies, occupancy fee formulas and assignment terms are all in there, and they are all easier to understand before you sign than after.

The short version

Pre-construction splits the price from the financing by years. The builder’s letter is not a mortgage, deposits are not a down payment, and occupancy fees are not payments on your loan. The lender’s real decision happens at final closing, against today’s appraisal and today’s version of your finances. Plan for that day from the beginning and it is manageable. Discover it in the last month and your options are whatever cash you have left.