What You Need to Know About Pre-Construction Homes

When you buy a pre-construction home, you’re buying property that doesn’t yet exist — whether it's a condo, detached house, townhouse or another type of house.

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, depending on the builder and stage of construction.

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

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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:

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.

Your deposit will generally be held in a trust account that is insured by a provincial authority. (In Ontario, for example, deposits are guaranteed by Tarion Warranty Corporation.) This provides some protection if your builder goes bankrupt or there’s a breach in the purchase agreement and you have the right to terminate the contract.

While this backstop may give you peace of mind, it doesn’t protect you against the unpredictability of the housing market.

For example, if you purchased a pre-construction unit in a project that was cancelled after three years of delays, you’d get your initial deposit back (plus a little interest in some cases). But you’d actually be further behind in your quest for homeownership because home prices will have risen in the three years you were waiting for your home to be built.

» LEARN: What does a new home warranty cover?

Additional costs 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.

Interim occupancy

What happens if your unit is finished but the rest of the building is not?

In some cases, you could end up paying a monthly occupancy fee during the transition period, which is called interim occupancy. This fee, which essentially acts as a rental payment on your own home, is not part of your mortgage.

Because building timelines can be unpredictable, legal transfer of ownership may not happen for months after you move in. That’s when you’ll stop being an occupant and start being a homeowner.

» CALCULATE: How much mortgage can I afford?