Pre-Sale Mortgages: What are they & How are they beneficial?
Time for the new hot topic of the week. This week’s questions revolve around pre-sales, specifically “what are they and how are they beneficial?”
Let’s quickly talk about what pre-sale homes are so that it is easier to navigate the questions that follow. A pre-sale home, condominium, townhouse, or apartment is when the property is available for purchase prior to its construction, or before it’s move-in ready. Pre-sale homes typically come with the 2-5-10 warranty. You will start paying the mortgage once the project is complete, thereby getting the chance to save and increase your down payment. It is important to note that buyers of pre-sales may not be able to get a mortgage in by completion. This is where it can get tricky even if the developer is offering in-house financing guaranteeing you a mortgage at completion. What can change? Well, everything including interest rates, lending rules, and the borrowers’ financial situation. It’s important to note that an approval is not unconditional and if buying a presale, borrowers should account for that risk and do everything they can to mitigate the risk to make sure the transition from a pre-approval to an approval is as smooth as possible.
Below I have expanded on this, and the topic of pre-sale mortgages as a whole, in my answers to some of the other essential questions I am commonly asked:
- Question: What are pre-sale mortgages & how do they work?
- Answer: There is no such a thing as an unconditional pre-sale mortgage. Even if the developer has an in-house financing with bank(s) that can guarantee a mortgage for you, if rules change, especially if your mortgage is insured, the mortgage cannot go through. This has happened and I always tell people to account for that risk. There are also other factors to consider, such as if the applicant loses their job, goes through a separation/divorce, incurs more debt, or has their credit go downhill. An approval is always conditional so any major changes or purchases should be factored in. For a firm approval, we can only hold the rate for 120 days, so that means the mortgage approval would have to take place within 4 months to completion. What I do for my clients is review their full application and consider what they qualify for TODAY. It’s unreasonable to just say, “well, in a few years my salary will be exponentially higher,” unless you are on a salary with set increases, like government employees, doctors, teachers, etc… In the meantime bump up your savings to cover any unexpected costs and keep everything as is. If you want to get a car or a loan, speak with your broker to see how much those numbers will affect your mortgage qualification. Everything will affect it, so you have to know by how much.
- Question: What makes pre-sales a potentially beneficial option?
- Answer: Let’s say you are currently in a home, (i.e. you already own, or are living somewhere where your situation is consistent), you want to get into the market but you don’t have fully established credit. You may have just started your employment/ business so you cannot provide a history, or perhaps your credit is not where it should be. A pre-sale essentially buys some time. Most pre-sales have a payment plan where you pay 15-20% of the purchase price over the course of the completion. Especially if you are not paying rent, this can be ideal as it allows you to save. If you are already paying high rent and intend to move into the home, it may be better for you to actually get into the market and pay down your own mortgage now. Pre-sale homes also offers a good option for investments as they generally increase in value by completion.
- Question: Who are pre-sales beneficial for?
- Answer: Anyone trying to establish credit/income history or save. A pre-sale can also be beneficial for someone who is paying low or no rent, someone looking at investments, and/or someone that is not in a rush to move and won’t be kicked out by their landlord.
- Question: What are the downsides of purchasing a pre-sale?
- Answer: Well, for one, expect a lot of delays. I have never EVER seen a project complete in time. Mine is currently 6 months outside of its “outside date,” which is the absolute latest the developer is promising to deliver your home. In addition to waiting, what you have in your contract may be completely different than what you get structurally and aesthetically. Seems crazy? Yes, I think so.
I have had clients who have received a completely different colour scheme then they signed up for. Let’s say they went with a light colour scheme and to their surprise they are getting dark after years of waiting. Of course this can be frustrating, especially since typically you have waited 3-5 years for your new home to finish. In my own experience; There was a window missing in the home, the colour scheme was wrong with different colour countertop and cabinets, (surprise), and my developer’s solution to all of this was an insulting offer for $2000 and allowing me to “walk away from my contract.” Who is my developer? Call me and I will spill the beans.
While this has been the case for me, other times this has happened with my clients, developers have been reasonable and compensated the client fairly.
In some insane cases, this can also happen: http://www.cbc.ca/news/canada/british-columbia/condo-developer-demands-15-more-money-from-buyers-after-new-westminster-project-hits-delays-1.4542538
- Question: Let’s say you are interested in a presale, how does one go about obtaining a mortgage for it?
- Answer: Same way as a regular pre-approval. Get pre-approved, start a plan, keep things constant, and most importantly get something you can afford now. When buying pre-sales, people typically get mortgages on these properties when they complete several months or years later. Getting a mortgage is a fairly straightforward process and for most buyers very few issues will occur.
At the end of the day, just like there are different mortgages to suit different people, so are the types of properties available. Maybe a presale is right for you, maybe it is not. Do you have more questions about pre-sales, mortgages, and what you might qualify for? Reach out anytime!