Pre-Construction Condo Buying in Canada: Risks and Financing

Mortgages & Home Buying

Pre-Construction Condo Buying in Canada: Risks and Financing

Mar 20, 202624 min read

Buying a pre-construction condo — purchasing a unit in a building that hasn’t been built yet — is one of the most popular and potentially rewarding real estate strategies in Canada. It’s also one of the riskiest. The allure is powerful: lock in today’s price for a property that won’t be delivered for two to five years, build equity before you even move in, and enjoy brand-new finishes and modern amenities when the building is finally complete.

But the risks are equally powerful: construction delays measured in years, closing cost surprises that run into tens of thousands of dollars, developers who go bankrupt before finishing the building, and market shifts that can leave you owing more than the unit is worth on completion day. Pre-construction condo buying requires a level of financial planning and due diligence that goes far beyond a typical resale purchase.

This guide covers everything you need to know about buying pre-construction condos in Canada: how the process works, the deposit structure, interim occupancy, assignment sales, financing challenges, what to do if the developer fails, and how to protect yourself at every stage.

How Pre-Construction Condo Purchases Work

A pre-construction condo purchase follows a fundamentally different timeline and process than buying an existing (resale) property. Here’s the basic flow:

1. The Developer Launches the Project: A developer acquires land, obtains zoning and development approvals, creates floor plans and marketing materials, and opens sales. This often happens years before construction begins. Developers sell pre-construction to generate the revenue needed to secure construction financing — banks typically require a project to be 70%–80% pre-sold before approving a construction loan.

2. You Visit the Sales Centre and Choose a Unit: The sales centre showcases model suites, floor plans, building amenities, and neighbourhood information. You choose a unit based on floor plans (the actual unit doesn’t exist yet), review the developer’s projected timeline, and discuss pricing and deposit structures with the sales team. You may work with a real estate agent who specializes in pre-construction sales.

3. You Sign the Agreement of Purchase and Sale (APS): The APS for a pre-construction condo is a lengthy, complex legal document — often 100+ pages. It covers the purchase price, deposit schedule, estimated completion date, unit specifications, building features, buyer’s and developer’s rights and obligations, and numerous other terms. You typically have a 10-day cooling-off period (in Ontario under the Condominium Act) after signing, during which you can cancel the agreement and get your deposit back.

4. You Pay Deposits According to the Schedule: Unlike a resale purchase where the full deposit is paid at once, pre-construction deposits are typically staggered over 12–24 months. The total deposit is usually 15%–20% of the purchase price, paid in installments.

5. Construction Occurs (2–5+ Years): The building is constructed over the next several years. During this period, you have no property and no mortgage — just a contract and your deposit money held in trust. You wait, watch construction progress (or delays), and prepare financially for closing.

6. Interim Occupancy (Ontario): In Ontario, there is often an “interim occupancy” period between when your unit is ready to move into and when the condominium is officially registered. During interim occupancy, you live in the unit and pay an “occupancy fee” (essentially rent to the developer), but you don’t yet own it and you don’t start your mortgage.

7. Final Closing: When the condominium is registered (or on the closing date in provinces without interim occupancy), you complete the purchase. Your mortgage begins, you pay the remaining balance of the purchase price plus closing costs, and you officially become the owner. This is the moment of truth — if you can’t close, you may lose your deposits and face legal action.

The Deposit Structure: How Much and When

Pre-construction condo deposits are typically structured as a series of payments spread over 12 to 24 months after signing the APS. The total deposit is usually 15%–20% of the purchase price, though some developers require more (up to 25%) and some offer reduced deposit structures as incentives.

A typical deposit schedule might look like this:

Deposits are held in trust by the developer’s lawyer, not by the developer directly. This provides a layer of protection — the developer cannot use your deposit money for construction or operating costs (in Ontario, deposits are protected under the Ontario New Home Warranties Plan Act and Tarion). If the developer goes bankrupt, your deposits in trust should be recoverable, though the process can be slow and complicated.

Interim Occupancy: The Period Between Move-In and Ownership

Interim occupancy is a concept primarily relevant in Ontario, though it can apply in other provinces depending on how the condominium registration process works. It’s one of the most confusing — and sometimes frustrating — aspects of buying pre-construction.

What Is Interim Occupancy?

When a condo building is physically complete enough for residents to move in, but the condominium corporation hasn’t been officially registered with the land titles office, there’s a gap. During this gap, you can move into your unit, but you don’t actually own it yet — the developer still holds title to the entire building.

During interim occupancy, you pay a monthly occupancy fee to the developer. This fee is not rent in the traditional sense, and it’s not a mortgage payment — none of it builds equity or is applied to your purchase price. It essentially covers the developer’s carrying costs for your unit.

How Is the Occupancy Fee Calculated?

In Ontario, the occupancy fee is regulated by the Condominium Act and consists of three components:

1. Interest on the unpaid balance of the purchase price: Calculated at the prescribed interest rate on the difference between the purchase price and your deposits. If you purchased at $600,000 and paid $120,000 in deposits, the interest is calculated on $480,000.
2. Estimated monthly common element fees (condo fees): Your share of the building’s operating costs.
3. Estimated property taxes: Your share of the property taxes for the unit.

A typical occupancy fee for a $600,000 condo might range from $2,000 to $3,500 per month. This is money you won’t get back — it doesn’t reduce your purchase price or contribute to your equity. Interim occupancy periods can last anywhere from a few months to over two years, depending on how quickly the developer registers the condominium.

Assignment Sales: Selling Before the Building Is Complete

An assignment sale is the sale of your purchase agreement — your right to buy the unit — to another buyer before the building is completed. You’re not selling a property (it doesn’t exist yet or you don’t own it yet); you’re selling your contract with the developer.

Why Buyers Assign

There are several reasons a buyer might want to assign their pre-construction purchase:

• Profit-taking: If the market has risen since you purchased, the unit may be worth more than your purchase price. You can sell your agreement at a premium, capturing the appreciation without ever completing the purchase.
• Changed circumstances: Job relocation, family changes, or financial difficulties might make completing the purchase impossible or impractical.
• Investment strategy: Some investors purchase pre-construction specifically intending to assign — they tie up a relatively small amount in deposits, let the market appreciate during the construction period, and sell the contract at a profit.
• Financing challenges: If you’ve been unable to secure mortgage financing for the closing, assigning the contract to someone who can close is better than defaulting.

Assignment Rules and Restrictions

Not all developers allow assignment sales — your APS will specify whether assignments are permitted. If they are, there are typically conditions:

• Developer consent: Most APS agreements require the developer’s written consent before you can assign. Developers often charge an assignment fee — typically $3,000–$10,000 or a percentage of the profit.
• All deposits must be paid: You usually can’t assign until you’ve paid all scheduled deposits.
• Developer vetting: The developer may vet the new buyer to ensure they can complete the purchase.
• Legal requirements: Assignment sales are still real estate transactions that require real estate lawyers, and in some jurisdictions, real estate agent involvement.

Tax Implications of Assignments

Assignment profits are fully taxable in Canada. The CRA treats assignment profits as business income (not capital gains) if they determine you purchased with the intent to flip. Business income is taxed at your full marginal rate — there’s no 50% capital gains inclusion rate. Additionally, assignment sales are subject to HST/GST on the profit.

The CRA has been increasing its scrutiny of assignment sales in recent years, particularly in hot markets like Toronto and Vancouver. Under-reporting assignment profits or failing to collect and remit HST can result in significant penalties and interest. Get professional tax advice before completing an assignment sale.

Closing Costs: The Pre-Construction Surprise

Closing costs on pre-construction condos are typically higher than on resale properties, and they include several costs that don’t apply to resale purchases. This is one of the most common areas where pre-construction buyers are caught off guard.

Development Levies and Cap Adjustments

One of the most contentious closing costs in pre-construction purchases is the development levy or charge adjustment. Many APS agreements include clauses allowing the developer to pass on increases in municipal development charges, education levies, and other government fees that occur between the date you sign the APS and the date the building is registered.

These charges can be substantial — development charge increases of $10,000–$30,000 per unit are not unheard of, particularly in fast-growing municipalities that regularly adjust their fee schedules. When you signed the APS, the developer may have estimated these costs based on current rates, but the actual charges at closing could be significantly higher.

Before signing an APS, have your lawyer carefully review the development levy cap clauses. Some developers cap their ability to pass on levy increases at a specific dollar amount or percentage. Others leave it open-ended, exposing you to unlimited increases. If possible, negotiate a cap on development levy pass-throughs.

HST on Pre-Construction Condos

HST (or GST in non-HST provinces) applies to all new housing, including pre-construction condos. For primary residences, the HST is typically included in the purchase price, and eligible buyers can claim the HST New Housing Rebate, which returns a portion of the HST paid. In Ontario, the combined federal and provincial rebate can be up to approximately $30,000 on homes priced up to $450,000 (with the rebate amount declining for homes priced between $450,000 and $506,774).

For investment properties (units you plan to rent out rather than live in), HST is still included in the price, but you cannot claim the new housing rebate unless you rent the unit to a tenant under a one-year lease, in which case you may be eligible for the HST New Residential Rental Property Rebate.

If the developer included the HST rebate in the purchase price (meaning they assumed you’d qualify and reduced the price accordingly), and you don’t qualify for the rebate (because you’re not using it as your primary residence and don’t meet the rental rebate criteria), you’ll owe the rebate amount back at closing — potentially an extra $24,000–$30,000+.

Credit Requirements and Mortgage Financing for Pre-Construction

One of the trickiest aspects of pre-construction buying is that you don’t need a mortgage when you sign the APS — you need one when the building is completed, which could be three to five years later. A lot can change in that time: interest rates can rise or fall, your income can change, lending rules can tighten, and your credit score can fluctuate.

Mortgage Pre-Approval for Pre-Construction

Getting a mortgage pre-approval before purchasing pre-construction gives you a sense of what you can afford, but pre-approvals are only valid for 90–120 days. Since the closing is years away, the pre-approval will expire long before you need the mortgage. You’ll need to reapply for a mortgage as the closing date approaches.

What matters at the time of closing is:

• Your credit score at that time: Not your credit score when you signed the APS. If your credit has deteriorated during the construction period, you may struggle to qualify.
• Your income at that time: You need to qualify based on your income at closing, not when you signed. Job loss or income reduction during the construction period is a real risk.
• Interest rates at that time: You’ll get the rates available when you apply for the mortgage near closing, not the rates that were available when you signed the APS. If rates have risen significantly, you’ll qualify for a smaller mortgage.
• The stress test at that time: The federal stress test applies, and the qualifying rate may be different from when you purchased. A higher qualifying rate means you can borrow less.
• Lending rules at that time: Banking regulations can change. Tighter lending rules could affect your eligibility even if your personal finances haven’t changed.

Protecting Your Financing Position

To minimize financing risk, take these steps throughout the construction period:

• Maintain excellent credit: Pay all bills on time, keep credit utilization low, and avoid taking on significant new debt. Your credit score at closing is what matters.
• Save beyond the deposit: Continue saving money throughout the construction period. You’ll need funds for closing costs, and having a larger down payment provides a cushion if you can’t borrow as much as expected.
• Maintain stable employment: Lenders want to see stable, verifiable income. If you’re considering a career change or starting a business, consider the timing carefully.
• Start the mortgage application early: Begin the mortgage process six to twelve months before the expected closing date. This gives you time to shop for the best rate and address any issues that arise during the application process.
• Consider rate locks: Some lenders offer extended rate holds or guarantees for pre-construction closings. These can protect you against rate increases, though they may come with a slight premium.

What Happens When the Developer Fails

Developer failure — whether through bankruptcy, project cancellation, or inability to complete construction — is one of the most devastating risks of pre-construction buying. While it’s not common, it happens, and when it does, the consequences can be severe.

Types of Developer Failure

Project cancellation: The developer decides not to proceed with the project, often due to rising construction costs, financing challenges, or insufficient pre-sales. In this case, the developer cancels all purchase agreements and returns deposits.

Developer bankruptcy: The developer company goes bankrupt during construction. The project may be taken over by another developer, completed by a court-appointed receiver, or abandoned entirely. Your deposits may be protected (if held in trust) or at risk (if the developer misused them).

Significant delays: The developer doesn’t fail outright but delays the project by years beyond the original timeline. You’re stuck in limbo — your money is tied up, your life plans are on hold, and you may have lost other purchase opportunities while waiting.

Deposit Protection

In Ontario, Tarion Warranty Corporation provides deposit protection for new home purchases. Tarion’s deposit protection covers:

If your deposits exceed the Tarion coverage limit (which is common for higher-priced condos), the excess amount may not be fully protected. You can purchase excess deposit insurance from a private insurer, or you can limit your deposits to the protected amount (though developers may not agree to this).

Outside Ontario, deposit protection varies. British Columbia’s Homebuyer Protection Act and other provincial legislation provide varying levels of protection. Regardless of province, ensure your deposits are held in trust by a lawyer — not by the developer directly — and understand the limits of any statutory protection.

Construction Delays: How to Protect Yourself

Construction delays are extremely common in pre-construction condo development. Labour shortages, material supply issues, weather, permit delays, and developer financial challenges can all push the completion date back by months or years. In Ontario, the Tarion warranty program provides specific protections around delayed closings:

Developers must provide firm closing dates or tentative closing dates with specific extension provisions. If the developer delays beyond the committed closing date, they may be required to compensate buyers for the delay — including coverage of additional living expenses if you’ve given notice to your current landlord or sold your previous home based on the original closing date.

Outside Ontario, delay protections are generally less robust. Review your APS carefully for clauses that allow the developer to delay — many APS agreements give developers broad rights to extend the closing date with little or no compensation to buyers. This is an area where legal review of the APS before signing is critical.

Financial impact of delays: Extended delays can significantly affect your finances. If you were counting on rental income from the unit, the delay means lost income. If you need to renew a lease or extend temporary housing arrangements, those costs add up. If interest rates change during the delay, your financing situation may be different than planned. Always build at least 12 months of delay into your financial planning for any pre-construction purchase.

Due Diligence: What to Check Before Buying Pre-Construction

Thorough due diligence is your best protection when buying pre-construction. Here’s a comprehensive checklist:

Developer Research

• How many projects has the developer completed?
• Were previous projects delivered on time and as promised?
• Are there outstanding lawsuits against the developer?
• Is the developer registered with the relevant provincial warranty program (Tarion in Ontario)?
• What is the developer’s financial stability? (This can be hard to assess, but a company with multiple completed projects and no history of bankruptcy is more reassuring.)

APS Review

• Have an experienced real estate lawyer review the entire APS — not just skim it, but review every clause.
• Understand the developer’s rights to make changes to the unit, building, and amenities.
• Understand the closing cost adjustments the developer can pass on to you.
• Identify any capped vs. uncapped costs (development levies, utility hookup charges, etc.).
• Review the assignment clause — can you assign if your circumstances change?
• Understand the delay provisions — what happens if the developer is late?
• Review the “material change” provisions — what constitutes a material change that gives you the right to cancel?

Financial Preparation

• Can you afford the full deposit schedule without straining your finances?
• Have you budgeted for closing costs (including worst-case scenarios for levy adjustments)?
• Have you stress-tested your financing at higher interest rates?
• Do you have a backup plan if you can’t secure mortgage financing at closing?
• Can you handle interim occupancy costs (if applicable) on top of your current housing expenses?

Market Risk: What If the Condo Loses Value?

One of the most significant risks of pre-construction buying is that the market value of the unit may decline between the time you purchase and the time you close. If the condo market drops, you could find yourself closing on a unit that’s worth less than what you agreed to pay.

This creates several problems:

Appraisal shortfall: When you apply for a mortgage at closing, the lender will order an appraisal. If the appraised value is lower than the purchase price, the lender will only lend based on the appraised value. You’ll need to make up the difference in cash. For example, if you purchased at $600,000 but the appraised value at closing is $540,000, and you need a $480,000 mortgage, the lender will only lend 80% of $540,000 = $432,000. You’d need $168,000 in cash instead of the $120,000 you planned.

Negative equity: If the value drops below your purchase price, you’re “underwater” — you owe more than the unit is worth. While this doesn’t affect your day-to-day life if you plan to live in the unit long-term, it limits your options. You can’t sell without losing money, and you can’t refinance for favourable terms.

Walking away: If the value drops dramatically and you can’t close, you face the prospect of losing your deposits (potentially $90,000–$120,000+) and being sued by the developer for the difference between your purchase price and what they eventually sell the unit for. This is a worst-case scenario, but it has happened in market downturns.

Pre-Construction vs. Resale: A Financial Comparison

Red Flags: Warning Signs in Pre-Construction Purchases

Watch for these red flags when evaluating a pre-construction condo purchase:

• Unusually low deposits: While attractive, very low deposit structures can indicate the developer is struggling to attract buyers. A healthy project typically reaches 70%–80% pre-sales with standard deposit structures.
• Unknown developer: A developer with no track record is a higher risk. First projects can be successful, but there’s no performance history to evaluate.
• Aggressive sales tactics: High-pressure sales techniques, “one day only” pricing, and artificial urgency are red flags. Legitimate developers don’t need to pressure you — the project should sell on its merits.
• Vague APS language: If the APS is unclear about closing costs, development levy caps, delay compensation, or material change provisions, it likely favours the developer. Have a lawyer review every ambiguous clause.
• No sales office or model suite: While not always a red flag (some projects sell successfully without elaborate sales centres), the absence of any physical presence should prompt additional due diligence about the developer’s commitment and resources.
• Unrealistic timelines: If the developer promises completion in 18 months for a 40-storey tower, that’s unrealistic. Major condo projects take three to five years minimum. Unrealistic promises are a sign of either inexperience or dishonesty.

Provincial Buyer Protections for Pre-Construction

Different provinces provide different levels of protection for pre-construction buyers:

Ontario: The most comprehensive protection through Tarion Warranty Corporation. Coverage includes deposit protection (up to $100,000), warranty on defects (one-year comprehensive, two-year mechanical/electrical, seven-year structural), delayed closing compensation, and coverage for builder bankruptcy. Ontario also mandates a 10-day cooling-off period for condo purchases.

British Columbia: The Homeowner Protection Office and BC Housing administer the new home warranty program, which includes 2-5-10 warranty coverage (two years for materials and labour, five years for building envelope, ten years for structure). BC also has a seven-day rescission (cooling-off) period for new condo purchases.

Alberta: The Alberta New Home Warranty Program provides coverage for new homes, including condos. Coverage includes one year for labour and materials, two years for delivery and distribution systems, five years for building envelope, and ten years for structural defects.

Other provinces: Coverage varies. Saskatchewan, Manitoba, and the Atlantic provinces have their own warranty programs with varying levels of coverage. Check with your provincial consumer protection office for specific details.

Frequently Asked Questions

Pre-construction condo buying in Canada offers genuine opportunities for both end-users and investors, but it demands a level of financial sophistication and risk tolerance that goes well beyond a typical real estate purchase. The extended timeline, complex legal agreements, uncertain financing landscape, and potential for developer failure create a unique risk profile that requires careful management at every stage.

The keys to successful pre-construction buying are thorough due diligence on the developer and the project, professional legal review of the APS, disciplined financial planning that accounts for worst-case scenarios, and maintaining your creditworthiness and financial stability throughout the multi-year construction period. With the right preparation and professional guidance, a pre-construction condo purchase can be a rewarding addition to your real estate portfolio or a great way to secure a brand-new home in a desirable location.