How Deposit Structures Work for Pre-construction Condos
If you’ve decided to purchase a pre-construction condo, you need to understand that financing works a bit differently compared to buying resale. Generally speaking, you need a down payment of 15% to 25% to secure your unit. The good news is this down payment is paid out over time so you don’t need to have all the funds available at once.
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The first thing to note is that if you’ve signed an agreement to purchase a condo in Ontario, you get 10-day cooling-off period. What that means is that you can rescind your offer with no fear of penalties. Most people take this time to have their lawyer review the contract and to get pre-approval from a mortgage lender, which is usually a requirement from the builder.
Although every contract is different, the deposit structure may be as follows:
- $5,000 with the offer
- 5% of the purchase price minus the initial deposit within 30 days
- 5% of the purchase price within 60 to 90 days
- 5% of the purchase price within 90 to 180 days
- 5% at occupancy
The reason deposits are required is because builders need to borrow funds, too. Generally speaking, lenders require builders to collect 15% in deposits and have 70% of units sold before they’ll release funds that builders will then use for construction.
What your payments will look like
Let’s take a look at how a deposit structure looks like if you decide to purchase a condo that costs $500,000 with a 20% down payment:
- $5,000 with the offer
- 5% of the purchase price minus the initial deposit ($20,000) within 30 days
- 5% ($25,000) within 60 to 90 days
- 5% ($25,000) within 90 to 180 days
- 5% ($25,000) at occupancy
Based on the above deposit structure, you will have paid $100,000 (20%) by the time you occupy your unit. It’s highly likely your condo won’t be registered when you move in so you will have to pay occupancy fees, which some people call “phantom rent” or a “phantom mortgage.” Once your condo is registered, the mortgage from your lender will cover the remaining 80% you owe.
With pre-construction condos, many people focus on the 15% they need within the first 90 to 180 days after signing the contract. It’s great that you’ve saved that much, but you need to consider your future carrying costs. Take a look at a mortgage payment calculator so you’ll know exactly how much your mortgage will cost.
Know the details of your contract
Every builder has different conditions in its contract. It’s possible that some builders may only require 15% of the purchase price in deposits total while others want 25%. There usually isn’t much flexibility with deposits when projects are first announced, but builders may be willing to extend some deadlines if the project is mostly sold.
If you’re purchasing a condo as an investment, you’ll definitely want to pay attention to the details of your contracts. Not all builders allow an assignment clause in the contract. What that means is that, you may not be legally allowed to sell your contract before your condo is built. This is rarely the case as it’s much more common for builders to charge a fee if you want the assignment clause included in your contract.
Not all builders require a mortgage pre-approval when purchasing pre-construction. If that’s the case with a project you’re interested in, be sure you use a mortgage affordability calculator to ensure you’ll be approved for a loan. The last thing you want is to find out that you don’t have the financing in place when it comes time to close.
Finally, the deposits you make sit in a trust that’s held by a third party. Although this is meant to protect your funds, Tarion—which provides new home warranty protection—only covers deposits on condo units up to $20,000.
This is a guest article by Ratehub.ca – a website that compares mortgage rates, credit cards, high-interest savings accounts, chequing accounts, and insurance with the goal to empower Canadians to search smarter and save money.
