Is Buying a Pre-Construction Home or Condo Worth it?

Are you ready to get into the real estate market? If so, there are several factors to consider.

One decision you need to make is whether or not to buy new construction. There are plenty of reasons why buying new is worth it, but there are also a few important drawbacks to think about.

Let's take a look at the pros and cons of buying a pre-construction home or condo before you take the plunge into the housing market.

Pros of Buying Pre-Construction

• Lower Price

One of the biggest benefits of buying pre-construction is that you can take advantage of appreciation before you start paying a mortgage. Generally speaking, real estate tends to increase in value over time, despite the odd blip here and there. By the time the home is finally ready for occupancy, the chances of it being valued higher than when you first signed the contract are pretty high.

That means you can benefit from an increase in property value without doing anything, including paying a mortgage. Sure, a certain amount of money is tied up in the form of a deposit, but you can likely benefit from a rise in value without doing much else. 

• Customization Options

Another great perk of pre-construction is that you have total control over all customization. You can choose the layout and finishes as you see fit.

When you buy resale, the odds of finding exactly what you're looking for in a home are low. While you may be able to find something close to what you want, you may have to take some time and money to make the necessary changes to decor and finishes as you see fit.

Home builders typically allow you to choose from different packages to help you fully personalize your home. It's easier to make all these decisions before the home is actually built than to make modifications to an existing structure.

• Time to Save For a Down Payment

When you buy new construction, you have to make a deposit. Depending on the cost of the home, that could mean tens of thousands of dollars. But your deposit is not your down payment.

Once the home is ready for you to assume from the builder, you'll need to finalize a mortgage (assuming you're not paying cash). Your lender will require a down payment as a formality of closing on your mortgage.

Your deposit will go towards the down payment, but you may need to top it up. While the property is being constructed, you can use that time to save up for your full down payment.

Cons of Buying Pre-Construction

• Possible Delays in Construction

A big risk when buying pre-construction is the potential for delays in construction. Unfortunately, delays are commonplace. That means whatever closing date the builder originally gave you may likely not be accurate.

Anything can happen during the construction process that could cause the closing date to be pushed out. Things like inclement weather, building permits, and other issues can cause delays, which means you could be waiting longer to move into your new home.

• Uncertainty in What the Home Will Look Like

When buying pre-construction, you only have plans and artist renderings to rely on to get an idea of what the home looks like. In some cases, the finished product might not be exactly what you had pictured. Make sure you're fully versed on all the plans and drawings and be prepared for the unexpected.

• Sales Tax

Homebuyers purchasing new construction in Ontario have to pay 13% HST on their properties. That's a hefty added cost to buying a home that you'll need to consider and budget for.

Thankfully, the New Housing Rebate can help you get back a partial refund on the sales tax paid. However, you'll need to meet certain requirements to qualify for this rebate.

• Uncertainty in Interest Rate

By the time the home is built and you're ready to take out a mortgage, there's always a chance that mortgage interest rates may be much higher than where they are today. Your homeownership budget might be doable for you at today’s mortgage rates, but would your finances be able to cover mortgage payments if rates increase by the time the home is built?

Make sure you crunch some numbers to compare what your mortgage payments might be like in various scenarios. For instance, calculate what payments would be based on rate increases of 1%, 2%, and even 3% to see what the possibilities are.