January 26, 2025
If you bought a pre-sale condo in Vancouver a few years ago and are about to close on it in today’s unpredictable environment, be aware: if you’re qualifying for a mortgage, there’s a strong chance an appraisal will be required to finalize your mortgage approval. More importantly, you should be prepared for the possibility that the appraised value may yield unexpected—and sometimes shocking—outcomes, affecting your initial cash-to-close expectations.
The real estate market has shifted. Depending on your condo’s location and size, its current market value might now be significantly lower than the price you initially agreed to when you signed the purchase contract at the sales center. While it was once common for pre-sale buyers in Vancouver to expect their condo’s value to appreciate by the time construction was completed, this assumption is no longer as reliable.
Let’s unpack what this means for buyers today, particularly those who need to qualify for a mortgage to complete their purchase.
The Loan-to-Value (LTV) Dilemma
When you agreed to purchase your pre-sale condo, you locked in a price—let’s say $700,000—and likely paid a 20% deposit ($140,000). This means you were planning for an 80% loan-to-value (LTV) mortgage, equating to $560,000. Fast forward to today: your condo’s appraised value has dropped to $625,000. Despite this decline, your purchase contract price remains fixed at $700,000.
Here’s where it gets tricky: the lender’s maximum mortgage amount is based on 80% of the lower of the current appraised value or the original purchase price. In this scenario, the bank would approve a maximum mortgage of $500,000 (80% of $625,000), leaving you with a $60,000 shortfall that must be paid out-of-pocket to the builder.
Options to Bridge the Gap
If you’re faced with this situation, here are some potential solutions to explore:
- Pay the Shortfall Out of Pocket: If you have sufficient cash reserves, you can make up the difference directly by paying the $60,000 shortfall to the builder at closing.
- Leverage Equity in Other Properties: If you own other properties, consider tapping into their equity through a mortgage refinance. This could provide the funds needed to cover the shortfall.
- Increase the Loan-to-Value Ratio on the Subject Property to Avoid an Appraisal: Cancel your current uninsured mortgage approval and re-qualify as an insured mortgage. Mortgages with LTV ratios above 80% are insured against default, meaning no appraisal is required. In Canada, three insurers handle such products: CMHC, Canada Guaranty, and Sagen. This approach offers two key benefits:
- Insurability: Insured mortgages in Canada rarely require appraisals. This means the lender will lend based on your contract price, effectively bypassing the appraisal issue. Qualification for this option may be stricter than an uninsured mortgage, but if overcome, it remains a viable qualifying alternative for many buyers. The only downside to this approach is that insured mortgages include a premium surcharge that gets tacked on to your mortgage. For many, this may seem a less costly alternative than having to come up with extra out-of-pocket funds to close the transaction.
For example, for a $625,000 valued property with a 10% down payment, your net mortgage proceeds to the builder would be $562,500. However, the gross mortgage amount that would register on your land title would include the 4% insurance premium of $22,500 (4% of $562,500), effectively increasing your mortgage to $585,000. It’s important to note that mortgage insurance premiums are tiered based on your down payment—the lower your down payment, the higher the premium. Although the insurance premiums are not an out-of-pocket expense, they directly impact your property equity.
- Insurability: Insured mortgages in Canada rarely require appraisals. This means the lender will lend based on your contract price, effectively bypassing the appraisal issue. Qualification for this option may be stricter than an uninsured mortgage, but if overcome, it remains a viable qualifying alternative for many buyers. The only downside to this approach is that insured mortgages include a premium surcharge that gets tacked on to your mortgage. For many, this may seem a less costly alternative than having to come up with extra out-of-pocket funds to close the transaction.
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- Receive a Refund on Your Balance Deposit: If you’ve already paid a 20% deposit to the builder during construction, the balance of your deposit may be refunded upon completion. For example, on a $700,000 purchase, if you qualify for a 90% LTV mortgage of $630,000, the cash-to-close required would be just $70,000—less than the $140,000 deposit you likely already provided. In this scenario, the remaining $70,000 would be returned to you at closing.
Final Thoughts
At the end of the day, whatever route you decide to take, it’s important to stay ahead of the game. Time isn’t on your side when it comes to closing real estate deals and waiting too long to act could end up costing you—both financially and emotionally. The sooner you address this reality and put a plan (or two) in place, the smoother things will go when your closing date rolls around. A little preparation now can save you a lot of headaches later.
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