What is a “presale” or “preconstruction” home?
A presale or pre-construction home is a unit offered for sale by a real estate developer before the building has been completed.
This is a common practice in Canada as you are only required to put down a deposit and are not obligated to pay the full purchase price until the unit is complete which can be 2-3 years in many cases.
The risk of purchasing a presale is that you enter into a legally binding contract, however, mortgage financing cannot be 100% guaranteed until 120 days prior to purchase completion.
This can become a problem when you apply for a mortgage and find out that you may not qualify.
A recent change in the Canadian mortgage rules is just one example of why someone may no longer qualify for a mortgage.
The Mortgage Stress Test
On January 1st, 2018, the federal government introduced a mortgage “stress test”. This stress test means that homeowners now have to qualify at the Bank of Canada Benchmark rate or the clients’ mortgage rate plus 2%.
For example, if the mortgage rate is 3.5%, you now have to qualify at 5.5%. Prior to January 1st, 2018, you could qualify at the hypothetical contract rate of 3.5%.
This change on average reduces your buying power between 15%-20%.
As you can imagine, there are many Canadians who have purchased presale condos or townhomes a couple of years ago and now require mortgage financing to complete their purchase on time.
The recent mortgage stress test has now disqualified many buyers from qualifying with their banks and credit unions.
Can I Still Get A Mortgage?
There are still options available as long as you have a total down payment of 20% or more.
Alternative mortgage lenders have relaxed guidelines which can help you to secure a mortgage if you’ve been turned down by the bank.
The cost, of course, will be higher than a traditional mortgage in exchange for their flexibility. The interest rate and administration fee are based on the perceived risk of your overall application.
If you need a rough quote, we would be happy to speak with you about your individual situation and provide some answers to you on a quick call. Click here to schedule a time.
The bottom line is that there are dozens of non-traditional mortgage lenders who offer specialized products and programs for scenarios just like this.
We encourage you to start the financial discussion at least 6 months prior to the purchase completion date. This should give you enough time to come up with a plan ensuring you meet your contractual obligations.
Please call us at 1-877-464-1106 or email us at firstname.lastname@example.org for any clarification or with any questions you may have.