How to Buy a Pre-Construction Condo in Toronto
The A to Zs on what you need to know about buying a new-build condo.
By Emily Southey | 17 minute read
If you’re interested in buying a pre-construction condo in Toronto, then you’ve come to the right place. Buying a new home is a major decision, especially in the case of pre-construction when it hasn’t been built yet. Continue reading to learn more about the benefits of buying pre-construction condos and to discover our step-by-step guide to buying a new-build condo in Toronto.
Toronto Pre-Construction Condos
Whether you’re buying a single-family home or a condo in Toronto, you will likely have the option of purchasing one that is already built (a resale) or one that is in the process of being built (a new build). Pre-construction condos in Toronto are typically bought directly from a builder or developer before the building is constructed. However, they can also be purchased from an original buyer who never moved into the property. When shopping for pre-construction condos, you will usually have the opportunity to tour a model unit and see a detailed floor plan and 3D digital renderings. Buying a pre-construction condo comes with many benefits. For example, they are often cheaper than their resale counterparts. Further, buying a new build condo means you will be the first person to live in the unit and you may even be able to customize certain details of the property, such as the kitchen cabinets or countertops. However, purchasing a pre-construction condo also comes with risk, since you’ve never seen the unit in person and the project could be delayed. Below, we’ve put together some key information that is unique to purchasing a pre-construction condo in Toronto. This information includes the required down payment, the 10-day cooling-off period, and the occupancy fees.
Down payments for pre-construction condos
One of the key differences between buying a pre-construction condo and a resale condo in Toronto is the required down payment. When buying a resale condo, Canadian homebuyers can put down as little as 5% of the purchase price. However, on a pre-construction condo, homebuyers are typically required to make a down payment of no less than 20% of the purchase price. This is a huge difference and could be a dealbreaker depending on your savings. That said, the down payments for pre-construction condos do not need to be paid at once the way they do with resale properties. Rather, the hefty down payment is paid in small instalments according to an agreed-upon payment schedule. An example of a payment schedule for a pre-construction condo in Toronto is as follows: The 20% down payment is the equivalent of $5,000. Five percent of the 20% is due within 30 days of the closing date, another 5% within 90 days, another 5% within 180 days, and the final 5% at occupancy. Ultimately, fee structures vary by the developer. In some cases, deposits might be higher at the beginning of the project and get lower as the project goes on.
After you’ve put down a deposit on a pre-construction condo in Toronto, what follows is the cooling-off period. The cooling-off period is the name given to the stretch of time (usually between seven and 14 days) that the buyer has to rethink their decision. During this time, buyers should get their finances in order and make sure they are ready to move forward with the condo purchase. This is also the time to have your purchase agreement reviewed by a real estate lawyer. Please note that cooling-off periods vary in length depending on the province or builder. For example, in Ontario the cooling-off period is 10 days, whereas in British Columbia it is as short as seven days. In most other Canadian provinces, the cooling-off period is determined by the builder or developer.
Closing costs for pre-construction condos
The closing costs for pre-construction condos are a little different than typical closing costs. While they are still out-of-pocket expenses, some of which overlap, there are several fees that are specific to condo purchases. Closing costs that are common in all real estate purchases include home inspection fees, land transfer taxes, mortgage default insurance, legal fees, and sales tax. In general, experts recommend that homebuyers allocate 1.5% to 4% of the total purchase price to closing costs. However, when you buy a pre-construction condo in Toronto, the percentage might be even higher to account for the additional expenses. Additional closing costs for pre-construction condos may include utility hookup fees, development and educational levies, the new home warranty plan enrolment fee, assignment fees (if you turn around and sell the unit before final closing), builders adjustments, occupancy fees (more on those below), and harmonized sales tax (HST). Unlike resale condominiums, new condos in Toronto are subject to HST. However, if you plan on living in the unit yourself, you might qualify for an HST rebate. But if you’re buying the pre-construction condo as an investment property, you may not be eligible unless you rent it out for at least one year. Please note that in Ontario, HST is 13%.
“A fixer-upper is a property that requires major repairs or renovations to live in comfortably. Since extra time and money are needed to get them in a livable condition, fixer-uppers are usually priced significantly lower than similar homes in better condition.”
Occupancy fees for pre-construction condos
If you purchase a pre-construction condo in Toronto, you may be required to pay occupancy fees. Occupancy fees must be paid anytime a homebuyer moves into the unit before the rest of the building is complete. If you decide to move in early, it is known as an occupancy period. During the occupancy period, you won’t be able to start making mortgage payments because the project is not yet complete. To make up for this, the builder or developer will likely require you to pay an occupancy fee for each month that you live in the unit until the project is complete and you officially take ownership. Occupancy periods and fees are specific to Ontario and are governed by the Ontario Condominium Act. The occupancy fee structure is designed in such a way that the builder will only ever break even through occupancy fees. Any interest made on the monthly payments must be paid back to the buyer and taxes are then recalculated at the end of the occupancy period (if there is a surplus, this money is also paid back to the buyer).
Since occupancy fees are often cheaper than the rent a buyer is paying in their current property, moving in early and paying occupancy fees is an appealing prospect to many buyers. Please note that during the occupancy period, the bare necessities (for example, elevators) will be in service, however, most of the building’s amenities ( fitness centre, gym, spa, terrace, etc.) will not be available. Further, since the building is still under construction, occupants should prepare for lots of noise.
Additional fees to consider
It’s important to remember that beyond the closing costs, occupancy fees, and down payment mentioned above, there might be a few other fees to budget for that are specific to pre-construction properties. For example, additional fees are likely to apply if you purchase a new condo with upgrades or extra features. The advertised cost of a pre-construction condo is usually for the base model. Adding anything extra will cost you more.
Overall, Toronto homebuyers must be prepared for the costs (beyond the purchase price or mortgage payments) that come with buying a pre-construction condo.
Tips for Buying a Pre-Construction Condo in Toronto
If you’re ready to take the plunge and buy a new pre-construction condo in Toronto, consider the tips below.
The first (and most important) tip for buying a pre-construction condo is choosing one you can afford. This is a great rule of thumb for all real estate purchases. You should only decide to buy a condo once you’ve saved enough money for the deposits and mortgage payments. If you aren’t sure how much you can afford with your current savings, contact a mortgage lender and get pre-approved for a mortgage. Getting pre-approved for a mortgage will give you an idea of how much money a mortgage lender will loan you should you decide to buy a condo.
Choose a developer with a good reputation
Before buying a condo, be sure to research the developer behind the pre-construction condo project. In fact, the developer or builder’s reputation should be a major factor in your decision. After all, it is the developer that ultimately controls the construction of your unit, so making sure you find one with a solid track record is crucial. Beyond researching the project developer online, your realtor might also have first-hand experience they can share. If they’ve worked with the builder in the past, they may know of any major red flags. For example, if the developer has a low completion rate, this likely means that they’ve cancelled projects in the past, which increases the odds their current project will also be cancelled. Even with deposit protection, you could still lose part of your deposit if the project is cancelled. Plus, you’ll have to start your condo hunt all over again. Therefore, when choosing a developer, look at their completion record and past developments. If there is little information on the developer or their past projects, or you stumble upon lawsuits relating to past projects, it’s likely a sign to move onto a new condo unit.
Find the right realtor
A third tip for buying a pre-construction condo in Toronto is to find the right realtor. Not all realtors are created equal. Experience is the most important asset when it comes to choosing a realtor. You want to find a realtor who knows the market and the neighbourhood but who also has experience with pre-construction properties. This way, they can advise you on which areas, new projects, and developments might be best suited to your needs and budget. Of course, realtors also play an invaluable role in the homebuying and negotiation processes. Choose a realtor you are comfortable with, whom you can trust, and whose communication style aligns with yours. Please note that realtors who are often at model condo units usually have a special relationship with the builder or developer. For this reason, it’s best to avoid hiring a realtor at a model home as they may not be as objective as someone unaffiliated with the project.
Visit the model unit and the construction site
When buying a pre-construction condo in Toronto, make sure to visit the model unit, as well as the project construction site. Model units allow homebuyers to picture themselves in the condo before it is built. As you walk through the unit, be sure to ask which features come with the base model and which cost extra, as many model units feature more expensive upgrades. After touring the model unit, we also recommend travelling to the construction site. Whether the project is already underway or not, doing so allows you to scope out the neighbourhood, noting nearby schools, shops, restaurants, and grocery stores. When on a site visit, remember to ask about any upcoming plans for the area. For example, if a new shopping mall, park, or school is in the works, or a new condo building is going up right across from yours, it’s important to be aware of it in order to make your decision.
Choose upgrades carefully
Upgrades in pre-construction condos can be expensive. The advertised price is usually the base model, and additional features can quickly add up. It also must be noted that some developers price upgrades way above the market average as a way of increasing profits from buyers. If you’re considering purchasing an upgrade, research how much a certain upgrade or renovation would cost if you hired a third-party contractor. This will help you determine whether the builder is charging a premium. If they are, you may ultimately decide to still purchase the upgrade for the convenience, but at least you will have all the facts.
Read through the purchase agreement
The purchase agreement, also known as the Agreement of Purchase and Sale (APS), is the official document you will sign when you purchase your pre-construction condo. An APS is a legally binding document. It details the conditions of the sale and the obligations of both parties. Specifically, it may include information like the earnest money deposit, closing costs, purchase price, real estate taxes, contingencies, date of possession, and more. Since a condo is a major purchase, you must review the purchase agreement carefully. More importantly, your realtor and real estate lawyer should also review the document. They can make you aware of anything that looks fishy or language that is too vague.
Nine Steps to Buying a Pre-Construction Condo in Toronto
Buying a pre-construction condo can be complicated. Thankfully, we’ve broken the buying process down into nine easy steps. Follow the steps below to purchase a pre-construction condo in Toronto.
1. Get pre-approved for a mortgage
The first step to making any real estate purchase is getting pre-approved for a mortgage. Mortgage pre-approval is the process by which a lender verifies that you qualify for a mortgage loan of a specific amount. Mortgage pre-approvals are based on the information and documentation provided, like proof of income/employment, proof of assets, identification, and information about any debts or financial obligations. When you get pre-approved for a mortgage, the lender will specify a term, interest rate, and principal amount. The principal amount is the most important piece of information as it can help homebuyers understand what they can afford.
Please note that a pre-approved mortgage is the maximum amount you may get for a mortgage; it doesn’t guarantee that the mortgage lender will loan you that amount. You will only know how much you are approved for once you’ve officially submitted your mortgage application. The finalized mortgage amount depends on many factors, such as the purchase price of the pre-construction condo and the down payment. The higher the down payment, the more likely you will be approved for a better mortgage rate. And since pre-construction condos usually require a minimum down payment of 20%, this could translate to an advantageous loan.
2. Settle on your budget and location
The second step to buying a pre-construction condo in Toronto is to determine your budget and settle on your preferred location. As mentioned in step 1, you can use your mortgage pre-approval to determine what you can afford. Next, it’s time to settle on a location. Each neighbourhood in Toronto is unique, so you will need to choose one that suits your lifestyle and budget. For example, living in the Entertainment District might sound exciting but it’s also one of the most expensive areas in the city. Alternatively, living somewhere like midtown, Leslieville, or Liberty Village might offer all the benefits of the city centre but with greater affordability. If you need help deciding on a neighbourhood, ask your realtor for their recommendations.
3. Find a realtor
The next step is to find a realtor. Choosing a realtor is no easy feat, with so many options out there. When looking for a realtor, be sure to interview at least three before hiring one. Ideally, you should find a candidate with experience in pre-construction condos and the local Toronto real estate market.
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4. Start shopping
Let the fun part begin! Once you’ve settled on a budget and location, gotten pre-approved for a mortgage, and found a realtor, it’s time to start shopping for pre-construction condos. The condo hunting process looks a little different when shopping pre-construction. Rather than touring resale condos, you’ll be walking through models similar to what the finished products will look like. You may also have the option of touring the construction site of each condo. To help narrow down your search, be sure to inform your realtor of preferences like square footage and building amenities.
5. Make an offer
Once you’ve fallen in love with a pre-construction condo, the next step is to make an offer. Working closely with your realtor, you will draft an offer that includes key pieces of information, such as the purchase price, earnest money deposit, closing date, date of possession, and any contingencies (for example, a home inspection contingency). If the seller (who is usually the developer or builder but could be the previous owner) accepts the offer, you can move on to the next step. But if they submit a counter offer, the negotiation phase begins. Of course, if the seller rejects your offer, it’s back to the drawing board.
6. Sign a purchase agreement
To finalize the purchase of your pre-construction condo, both the buyer and seller need to sign the purchase agreement. The purchase agreement is a legally binding contract outlining your future ownership of the condo once the building is complete and registered with the municipality.
7. Secure your financing
After the purchase agreement is signed, the cooling-off period begins. In Ontario, the cooling-off period lasts 10 days, meaning you have 10 days to secure your financing, make the first deposit payment, or back out of the sale, should you choose to do so. Assuming you decide to go through with the transaction, now is the time to formally apply for a mortgage and make your first deposit payment (usually 5% of the purchase price).
8. Make your payments
As mentioned, down payments for pre-construction condos in Toronto work differently than resale properties. They are made via a payment schedule, rather than being paid in a lump sum upfront. Therefore, after signing the purchase agreement, you will be responsible for making subsequent deposit payments according to the agreed-upon payment schedule. If you decide to move into the condo early (during the occupancy period), you will also need to make monthly occupancy payments in addition to the down payment instalments.
9. Take assignment of the property
The final step to purchasing a pre-construction condo in Toronto is taking assignment of the property. Once construction on the condo building is complete, you will pay the final closing costs and start making monthly mortgage payments. At this stage, ownership of the unit is officially transferred to you and it is your property. If you haven’t already moved in, now is the time!
Frequently Asked Questions
Is it smart to buy pre-construction?
Pre-construction condos and homes are usually sound investments, so long as the developer/builder is reputable and the home is being built in a desirable neighbourhood. Ultimately, whether a pre-construction condo is a smart investment depends on your personal circumstances, as well as the housing market. Since pre-construction condos can take years to complete, the market may change from when you first bought one. But if you’re buying the property pre-construction, you’re probably getting it at a reduced price, and if it’s in a popular or rising neighbourhood, it is likely to be a smart financial decision.
Are pre-construction condos cheaper?
Yes, pre-construction condos are typically cheaper than resale condos. They also tend to be less expensive than traditional single-family homes, including pre-construction homes.
Can you use an RRSP to buy pre-construction?
Yes, homebuyers in Canada can use their Registered Retirement Savings Plans to buy a pre-construction condo in Toronto under the Home Buyers’ Plan. The Home Buyers’ Plan (HBP) is a federal assistance program designed to help first-time homebuyers purchase homes in Canada. Through this program, you can use your RRSP savings to finance your home. Specifically, homebuyers can withdraw funds (up to $35,000 tax-free) from their RRSPs to buy or build a qualifying home. Buyers then have 15 years to pay back the withdrawn funds. To be eligible for the Home Buyers’ Plan, you must meet the following criteria:
The RRSP funds you borrow must have been in your account for a minimum of 90 days before withdrawal;
You cannot have owned a home in the last four years;
If you’re buying a home with a spouse or common-law partner who is not a first-time homebuyer, you cannot have lived in a house that they owned for more than four years;
You must have entered into a written agreement to buy or build a qualifying home;
You must plan to live in the home you purchase within one year of buying it and it must be your primary residence;
If you have used the Home Buyers’ Plan before, you cannot have any outstanding balance due;
You must withdraw the money from your RRSP within 30 days of taking title of the property; and
You must be a Canadian resident.
What should I look for when buying a pre-construction condo?
Homebuyers in Toronto should be sure to research the reputation of the developer or building behind the pre-construction project. Some developers have better track records than others. To avoid issues, such as project delays or cancellations, choose a developer with a good completion record and a long list of past projects.
How do you buy a pre-construction condo in Ontario?
The first step to buying a pre-construction home or condo is finding a realtor to help you. From there, your realtor can make you aware of different projects and developments in your preferred neighbourhoods. You will look at model homes, visit the neighbourhood and site of the home, research the reputation of the developer, settle on customizations, and ultimately, make an offer and sign a purchase agreement, should you choose to do so. After signing the agreement, you’ll make the agreed-upon instalment payments and move into the home when it is complete.
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