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: On 0K 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. Get Expert Advice Call (416) 822-7357 Frequently Asked Questions Is my deposit protected if the developer goes bankrupt? In Ontario, Tarion protects deposits up to $20,000 per unit. Beyond that, it depends on whether the developer used a trust arrangement. Always verify. Can I get a mortgage pre-approval for a pre-construction unit? You can get a preliminary qualification, but the actual mortgage won't be approved until close to closing. Rates and qualification criteria at that time may differ. Should I use the developer's preferred lender? Not necessarily. Developer-affiliated lenders may offer convenience but not always the best rates. Shop independently.
