An Answer to Florin’s Question: Can a Presale Bought High Ratio be Completed on Low Ratio?

Financial Leverage and Presale Condos in Vancouver

I LOVE Questions and Comments on my blog posts and appreciate them HUGELY!!

We recently had a great question (Thanks Again Florin!) in the comments section of Episode 2 of How to Buy a Presale Condo where we discussed the advantages of pre-construction condos for Owner/Occupiers.

This question was SOOOO GOOD, I decided to bring in a mortgage broker, Chad Watts and shoot an entire video on this topic!

Florins Question:

I asked my mortgage specialist about point 3 “Financial Leverage.” The one where you mentioned “buyer who previously was a high ratio borrower to become a low ratio borrower” if the property value goes up. She told me that this in not the case anymore. The bank will only base the financing on the purchase price of the home. Is this correct and if so is this true to all banks?

The mortgage specialist Florin spoke to is right.

There are rules restricting lenders from giving a mortgage on the actual market value of a presale condo if it has gone up in value from when it was purchased pre-construction to when it completes.

BUT, this does not mean the buyer of a presale condo in Vancouver cannot leverage the increase in value of the property between the time of purchase and the completion date.

Can a Presale Bought High Ratio be Completed on Low Ratio? Yes, in a Roundabout Way!

This only works when the presale increases in value between the time the presale is originally purchased and when it completes.

Consider this example:

A buyer purchases a presale condo at a contract price of $1 with a $.15 presale deposit. The property at completion is worth $2

This is one way it can be done:

Borrow the Amount Needed to Complete Low Ratio and Get a Variable Rate Open Mortgage or a Line of Credit

Due to the rules Florin mentions above, the presale owner cannot get a mortgage on the pre-sale condo at the market value of $2 when the property completes, ie when the Developer finishes the property and the Buyer has to take ownership and get a mortgage.

The owner of a pre-construction condo bought the property high ratio (ie with less than 20% down) with a $.15 deposit.

Shortly before the completion of the building, the Buyer borrows the amount needed ($.05) from friends, family, etc. to complete on the property low ratio (with a 20% down payment to avoid the CMHC mortgage insurance premiums) at the original purchase presale price. The buyer will need to get a variable rate open mortgage or a line of credit to make this work.

For Example:

The Buyer bought the presale for $1 with a $.15 presale deposit. The buyer borrows $.05 to be able to complete with 20% down with $.20 to avoid the CMHC insurance premiums. The buyer then has a mortgage of $.80 and $.20 invested as a down payment.

Re-Finance Shortly After at the Higher Market Value

For the sake of argument, lets say you have your Realtor do a market analysis and the market value of this presale property is worth $2 upon Completion.

PLEASE NOTE! I am always available to do a
free market analysis on your presale condo!! Please call me at 604-763-3136 or email me to learn more!

Shortly after the Buyer (owner) completes on the presale and gets the initial mortgage above, the buyer (owner) of the presale then refinances the property (and pays little or no penalty due to the type of mortgage mentioned above) and uses the proceeds to pay back the friends, family, etc. their $.05.

The buyer can then withdraw the remaining equity up to 80% loan to value to stay low ratio and have a mortgage of $1.60 or they can keep their payments low and leave the equity in.

Remember Folks! If you are thinking of buying a presale condo or getting a mortgage on a presale condo, always make sure to consult first with your mortgage lender, accountant, lawyer, and Realtor!

Again – I LOVE QUESTIONS & COMMENTS and Would LOVE to hear your thoughts on this topic!

Looking for Presales in Vancouver?

Check out this very cool Presale Map for Vancouver!

Worried about buying a Condo that Leaks?

Check out this great explanation of Leaky Condos!

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