Barry Choi
Kurt Woock
Beth Buczynski
When you buy a pre-construction home, you’re buying property that doesn’t yet exist. It can be a condo, a detached house, a townhouse or another type of dwelling.
With a new build, you’re usually able to customize aspects of the design, such as the colour of your cabinets and your kitchen countertops. You might even be able to make changes to the layout.
Pre-construction homes are typically bought directly from the builder, but you can sometimes purchase the contract on a new build from the original buyer before they move in. This is known as an assignment sale. Depending on when you buy the contract, you may still be able to customize the home.
Pre-construction home pros and cons
Pros
- Customizable. You might be able to tailor the home’s finishes and layout.
- No bidding wars. You buy directly from the builder.
- Low upkeep. Newer homes tend to have lower maintenance costs.
- Ease into cash demands. The deposit may be paid in increments over multiple months.
Cons
- Risk of delays. Project hiccups could significantly postpone your move-in date. In some instances, construction comes to a permanent halt.
- Fees can rise. Beyond the purchase price, you may have to pay construction-related fees and taxes.
- Potentially costly transition. If you buy a pre-construction condo, you may pay occupancy fees, which is essentially monthly rent that doesn’t pay down your mortgage.
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How the pre-construction payment schedule works
Generally speaking, pre-construction properties require you to have a deposit of 20% of the purchase price.
This deposit is required before you get a mortgage, so it’s a healthy sum to save. All builders have different payment schedules, but a typical one would look something like this:
- $5,000 on signing the contract.
- 5% (minus $5,000) after 30 days of signing.
- 5% after 60 days of signing.
- 5% after 120 days of signing.
- 5% on occupancy.
Some builders have a longer payment schedule which gives you more time to get your funds together. Some will even have set amounts instead of percentages.
When buying a new house, your deposit should be insured by Tarion Warranty Corp. This provides some protection if your builder goes bankrupt, there’s a breach in the purchase agreement, or you have the right to terminate the contract. If you’re buying a pre-construction condo, your deposit is covered by the Condominium Act.
While this insurance may give you peace of mind, it can work against you. For example, let’s say you purchased a pre-construction unit, and the project gets cancelled after three years of delays. You’d get your initial deposit back, but if there were any gains in the real estate market, you might not be able to afford a similar new home at current prices.
» LEARN: What does a New Home Warranty cover?
Additional fees to consider
When purchasing a pre-construction home, the advertised price is usually for the base model. If you want anything extra, additional charges will apply. While it’s possible to negotiate the purchase price, builders will likely give you “free” upgrades instead of a lower price.
Even though you can make upgrades, the builder will likely limit your choices. In addition, going for anything extra can become expensive since builders profit from the upgrades. While getting everything upgraded directly from your builder can be more convenient, it might be cheaper to do the upgrades after you move in.
It’s worth asking if you can change the layout or add different things such as more electrical sockets or pot lights. Even if it’s not included on their price list, it may still be available at a cost.
When buying a new construction home, you need to pay land transfer tax (if applicable) and sales tax. You’ll also need to pay a real estate lawyer to help you with the closing of the property. They’ll cover things such as conducting a title search and ensuring the home is registered in your name.
You might be eligible to recover some of these taxes by claiming the GST/HST New Housing Rebate, or exploring tax credits for first-time home buyers in Canada.
Nerdy Tip: It’s common for pre-construction contracts to have a “cooling-off period” — usually 10 days — during which you can back out. Use this time to inspect contract details carefully, perhaps with the help of a lawyer. Make sure you fully understand the costs, timelines and uncertainties laid out in the contract.
Taking occupancy
Say you bought a condo in a building with 80 units. What happens if your unit is finished but the building is not?
The answer can be complicated, but the uptake is that you could end up paying a monthly occupancy fee during the transition period, which is called interim occupancy. This fee is not part of your mortgage. Another side effect of building timelines is that legal transfer of ownership of your unit may not happen until months after you move in.
Make sure you understand what interim occupancy looks like in any project you’re considering.
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