Pros & Cons of buying a Presale

Kelly Hudson • May 19, 2023

Buying a presale is a popular strategy in the real estate market that allows buyers to purchase a home before it is completed or even before construction has begun. This approach comes with both advantages and disadvantages, which are important to consider before making any investment decisions.


Pros of buying a presale:

1. Lower cost: One of the most significant advantages of buying a presale is that it can be less

expensive (no guarantees!) than purchasing a finished property. Builders and developers often

offer early bird incentives to attract buyers, such as discounts on the purchase price or upgrades.


2. Increased value: If the market trends upwards between the time the presale is purchased and

the completion of the property, buyers could see a significant increase in the value of their

investment. This could mean that buyers are able to sell the property for a higher price than they

paid for it, providing a healthy return on investment.


3. Extended closing timeline: Buying a presale also allows for a longer closing timeline, which can

be advantageous for buyers who may not be able to move in right away. This can also provide

more time to secure financing, saving buyers from the stress of having to arrange a mortgage in a

hurry.


4. Customization: Another advantage of purchasing a presale is that buyers may be able to have

some say in the design and customization of their property. Buyers can often choose from a variety

of finishes, fixtures, and layouts to create a personalized living space that meets their needs and

preferences.


Cons of buying a presale:

1. Uncertainty: One of the biggest risks of buying a presale is that the property may not turn out as

expected. Since the property is not yet built, buyers must rely on floor plans and artist's renderings

to imagine what the finished product will look like. There is always the possibility that the finished

product will not live up to expectations, leaving buyers disappointed with their investment.


2. Delays: Another risk of buying a presale is that construction may be delayed. This could be due to

a variety of factors, including labour disputes, material shortages, poor weather conditions &

Pandemics. These delays could leave buyers without a place to live or stuck in their current living

situation for longer than expected.


3. Mortgage Financing: Another challenge of buying a presale is securing mortgage financing. Since

buyers are purchasing a property that has not yet been built, they must jump through more hoops

to secure a mortgage. Lenders may require more documentation or offer less favourable terms to

buyers of presales, which could impact their ability to afford the property.


4. Limited flexibility: Buying a presale also requires a certain level of commitment from buyers.

Once the contract is signed, it is VERY difficult to back out or make changes to the purchase

agreement. This can be challenging for buyers who have a change in circumstances or who decide

they no longer want to purchase the property.


5. Higher cost: One challenge with buying a presale is that, once it has been completed (1, 3 or

even 5 years down the road), it could be worth less than you paid if there is a downturn in the

market. We all assume home prices are going to increase, and eventually that may be true…

however there are always ups and downs in the housing market.


So, what can buyers do to overcome these challenges? One strategy is to work with a reputable developer who has a track record of completing projects on time and to a high standard. It's also important to carefully review all marketing materials and floor plans to get a sense of what the final product will look like. Buyers should also consider the neighbourhood carefully, researching the area to get a sense of what it will be like once the home is completed.


In conclusion, buying a presale can be a smart investment for some buyers, particularly those who are looking for a more affordable way to enter the real estate market or who are interested in customization options. However, presales also come with risks, including uncertainty around the finished product and the potential for delays or challenges with mortgage financing. As with any investment decision, it is important for buyers to carefully consider their options and carefully weigh the pros and cons before making a purchase.

Kelly Hudson
MORTGAGE ARCHITECTS
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First Home Savings Account (FHSA) - 5 Things You Need to Know

By Kelly Hudson • 09 Apr, 2024
Canadian homebuyers face a significant challenge when it comes to accumulating the hefty down payments required to purchase homes in our increasingly expensive housing markets. According to the National Bank of Canada's housing affordability index from February 2024, the down payments needed for the median homes in cities like Toronto and Vancouver surpass $200,000. In response to this growing concern, the federal government introduced the First Home Savings Account (FHSA) on April 1, 2023, aiming to help improve the financial down payment burden on prospective homebuyers. However, while the FHSA offers promising opportunities, it's crucial for would-be buyers to understand its workings and potential risks. Here are five essential things prospective homebuyers should know before opening their own FHSA: 1. How does the FHSA work? The FHSA allows account owners to put as much as $8,000 in savings away annually, and up to $40,000 over five years. Contribution room starts growing the first year the FHSA is opened. If you don’t have the whole $8000 now – consider starting your FHSA account this year with $100. Then if/when the rest of the cash comes available you can top up the account to a maximum of $8000/year (maximum contribution $40K) That money is tax-free on the way in and on the way out, meaning any contributions can count as deductions on income tax and are not taxed when withdrawn for a down payment on a qualifying home. The FHSA is “the best of both worlds,” with funds behaving like a registered retirement savings plan (RRSP) on the way in and a tax-free savings account (TFSA) on the way out. Moreover, funds in the FHSA can grow tax-free for up to 15 years, after which they must be withdrawn or transferred to an RRSP. It's important to note that withdrawing funds for purposes other than a home purchase results in the amount being added to your taxable income for that year. 2. You don’t have to be a first-time buyer Contrary to popular belief, the FHSA is not exclusively reserved for first-time homebuyers. Eligibility extends to Canadian residents aged 18 (or 19 in some provinces) to under 71. You also must not have lived in a home owned by you OR your spouse in the year that you open the account or any of the preceding four years. This means Canadians who owned their home but sold more than five years ago, or currently own the property but don’t live there as their principal residence, are qualified to open an FHSA. That opens the account up to anyone who owns and rents out a property but also rents themselves. 3. What do you do with the money once it’s in the FHSA? Funds within the FHSA can be held in various investment vehicles, including high-interest savings accounts or securities. The choice of investments depends on individual risk tolerance and time horizon. While long-term savers might opt for stock market investments to capitalize on potential gains, those nearing their purchasing goals might prefer more conservative options like guaranteed investment certificates (GICs) or fixed-rate savings accounts. 4. Multiple accounts can work together Individuals can open multiple FHSAs across different financial institutions without exceeding annual or lifetime contribution limits. Although joint accounts aren't permitted, funds from multiple FHSAs can be pooled towards the purchase of a single home. Additionally, the FHSA can be used alongside other savings vehicles such as TFSAs and the Home Buyers' Plan (HBP), further enhancing purchasing power. Home Buyers Plan (HBP): Qualifying home buyers can withdraw up to $35,000/each from their RRSPs to assist with the purchase of an owner-occupied home . The funds are not required to be used only for the down payment, but for other purposes to assist in the purchase of a home. These funds are withdrawn, with the condition that the funds are paid back into the account over the course of 15 years (or you are taxed on the portion not being repaid into your RRSP). Please note that RRSP funds MUST be in account for 90 days BEFORE removing for down payment. A down payment is not the only thing buyers need to prepare to be financially ready for a home. Canadians should consider their “credit-worthiness,” as well, and make sure they’re paying down debt so that when they’re ready to buy and cash out their FHSA, that they will qualify for the mortgage amount they need. BLOG 8 Credit Rules You Need to Know, Before You Buy a Home BLOG 5 C’s of Credit to get a Mortgage 5. Don’t forget about the tax implications Opening an FHSA entails tax obligations, including reporting contributions and transactions in the annual tax return. A T4FHSA slip provided by the lender details these transactions, with individuals required to fill out Schedule 15 for deductible contributions. Notably, contributions to the FHSA are tax-deductible, but transfers to an RRSP are not. Individuals have the flexibility to carry forward deductions to future tax years if desired.

Understanding Debt and Its Impact on Mortgage Approval

By Kelly Hudson • 13 Mar, 2024
Securing a mortgage significantly depends on your credit score and debt load. Understanding how different types of debt affect mortgage affordability is crucial. Debt falls into two categories: secured and unsecured. Secured debt, backed by collateral like a house or car, provides lenders security in case of default. Unsecured debt, such as credit cards, lines of credit, and student loans, poses higher risk for lenders and typically carries higher interest rates. Here's how different types of debt influence your credit score and mortgage approval: Credit Cards are unsecured debt, offering revolving credit lines with interest rates based on creditworthiness. Responsible credit card usage can positively affect credit scores, but defaults or late payments can lead to higher interest rates and decreased creditworthiness. Line of Credit : Like credit cards, lines of credit are unsecured and provide borrowers access to a predetermined credit limit. Responsible use can improve credit scores, while defaults can have negative credit repercussions. Student Loans: Despite being unsecured, they can enhance credit scores if paid on time. They contribute to the debt-to-income ratio. Auto Loans: Auto loans are secured debt, with the vehicle serving as collateral. They can diversify debt portfolios and improve credit scores. Existing Mortgage Loans: Secured by the property, timely payments enhance credit scores. Missed mortgage payments raise red flags for new lenders. Maintaining a balanced mix of debt types strengthens credit scores and mortgage eligibility. However, over-borrowing can be harmful.
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