Pre-construction can be a smart entry point into the market—or a financial minefield. The sales centre won't tell you about the mortgage risks, but we see them play out regularly. Here's what you need to know before signing.
The Deposit Structure Risk
Pre-construction deposits are typically 15–20% of the purchase price, paid in installments:
| Timeline | Deposit | Cumulative | On $600K Unit |
|---|---|---|---|
| Signing | 5% | 5% | $30,000 |
| 30 days | 5% | 10% | $60,000 |
| 90 days | 5% | 15% | $90,000 |
| Occupancy | 5% | 20% | $120,000 |
The risk: These deposits are tied up for 2–5 years during construction. If property values drop, you could owe more than the unit is worth at closing—and your deposit is at risk if you can't close.
The Financing Gap Problem
This is the biggest risk we see, and sales agents rarely mention it:
At purchase (2024): You qualify for a $480,000 mortgage at today's rates.
At closing (2027): Rates are higher, your income may have changed, the stress test is tighter—you now qualify for only $430,000.
The gap: You need an additional $50,000 that you didn't plan for. Options are limited and expensive.
Protection strategies:
- Get pre-approved for more than you need
- Save additional funds during construction
- Have a backup plan (co-signer, family help)
- Avoid leveraging your full qualification
Understanding the mortgage stress test
Occupancy vs. Closing
Pre-construction has two dates that confuse buyers:
Interim occupancy: You move in but don't own the unit. You pay "phantom rent" (monthly fees covering interest on the balance, property taxes, and maintenance fees). This is NOT mortgage payment—it's lost money.
Final closing: Title transfers, mortgage activates. Could be months or years after occupancy.
Phantom rent on a $600,000 unit:
- Interest component: ~$2,000/month
- Estimated taxes: ~$300/month
- Maintenance fees: ~$400/month
- Total: ~$2,700/month of non-equity-building payments
Assignment Sales
If you can't or don't want to close, you may be able to assign (sell) your contract to another buyer:
Considerations:
- Developer must consent (and may charge 1–2% fee)
- You pay tax on any profit as business income (not capital gains)
- The assignee must qualify for financing independently
- Market conditions affect your ability to find a buyer
What to Look For in the Agreement
Key clauses to review with a real estate lawyer:
- Capped price increases — Can the developer increase the price?
- Material change clause — What changes can the developer make?
- Delayed closing penalties — Is the developer liable for delays?
- Assignment rights — Can you sell your contract?
- HST inclusion — Is HST included in the price or extra?
- Cap on development charges — Who pays for municipal levy increases?
Proceed With Eyes Open
Pre-construction isn't inherently good or bad—it's about understanding and managing the risks. Get independent legal advice, don't stretch your qualification to the maximum, and always have a contingency plan for closing.
Planning a Pre-Construction Purchase?
We'll help you understand the financing implications before you sign.
