When you buy a home, the cost is split into two main parts: the down payment and the mortgage. The down payment is the upfront cost, while the mortgage is a loan that’s paid over an extended period, usually about 25 years.
Though the mortgage works more or less the same way whether you’re buying an existing home or a pre-construction unit, the structure of the down payment will differ depending on the type of home you purchase. In this article, we examine how a down payment for a pre-con unit is different from a traditional down payment.
Traditional down payments in Ontario
In Ontario, a down payment must be at least 5% of the total cost of the home. For example, if you were to purchase a home for $500,000, your down payment would need to be at least $25,000.
However, most people make down payments larger than 5%. This is partly to reduce the amortization period of their mortgage - a larger initial payment means a smaller loan to pay off - and partly to avoid paying mortgage default insurance.
Mortgage default insurance is mandatory when a down payment is less than 20% of the total price, and costs between 2-4% of the home price, depending on how close to the threshold the payment happens to be.
Over the life of a mortgage, default insurance can really add up, so it’s preferable to avoid it if possible.
Pre-construction down payments in Ontario
Down payments for pre-construction units work differently than down payments for traditional homes. The exact structure is determined by the developer, and may vary between projects, though most follow a similar framework.
The typical down payment structure for a pre-con unit works something like this:
Deposit on signing ~$5,000
5% (including deposit) due within 30 days
5% due within 3-4 months
5% due 9-12 months
5% due 18-24 months
To reiterate, these figures represent common down payment plans for pre-construction condos. Different projects will entail different requirements, and it’s important to know the structure before making your deposit.
The impact of the pre-con down payment structure
Though it’s difficult to say either the traditional or pre-con structure is inherently favourable, it’s worth noting that developers construct down payment plans to attract buyers. Most people, therefore, tend to find pre-construction down payment plans more palatable.
One reason for this is the small initial payment: a $5,000 deposit is quite minor for a home, and is therefore an easy entry point to the market.
A second reason is that the down payment, in its entirety, almost always exceeds the 20% threshold, thereby eliminating the need for costly mortgage default insurance.
A third reason is that while the full down payment will still be sizable, buyers have a longer time to amass the necessary funds. If, for example, staggered payments of 5% are made over 24 months rather than in a single bulk payment, that’s two extra years worth of income that can be put toward the pre-con unit’s down payment.
To analogize, the down payment for most pre-construction units is similar to an aggressive mortgage plan that’s free of interest.
The downside of the pre-con structure is that the 20% minimum may be difficult to afford for some buyers, even when staggered over 18-24 months. While reaching this level ensures the avoidance of mortgage default insurance it may also prohibit some buyers from purchasing a pre-construction unit altogether.