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They say the one sure mark of a con is the promise of free money. And when promises of “free” cash come from a condo developer, it may not be a con, but it ain’t free either.

If your down payment funds are limited, be especially careful of builder incentives. I’ll explain why.

Throwing a wrench in your financing

“Perhaps the most generous incentive seen so far has come from developer Camrost Felcorp for their Raglan House condominium in midtown Toronto,” The Globe and Mail’s Shane Dingman reported on Wednesday.

According to a price sheet the builder sent me, it offers $3,000 a month in rebates for two years, or $72,000 worth of incentives for those who buy a new two-bedroom condo.

Now, if all you have is the minimum 20-per-cent down payment for that condo, this incentive could be a problem.

McLister: This week’s lowest fixed and variable mortgage rates in Canada

“Rebates of this nature can impact how much you can borrow,” says Shawn Stillman, a mortgage broker and co-founder of Toronto-based Mortgage Outlet.

Here’s an example to illustrate: Let’s say you bought a condo for $1,300,000 from a builder that gives you $3,000 a month in rebates for two years after closing. Any lender who knew about this would deduct that $72,000 incentive from the value they lend against. The reason is simple. The incentive effectively implies that their security – the property – is worth less than the official asking price.

Assuming an appraisal supports it, the lending value in the above example would only be $1,228,000. Conventional lenders would then only mortgage up to 80 per cent of that, or $982,400.

Some folks would buy for $1,300,000, expect to put down the minimum down payment of $260,000 and get a mortgage for only $982,400. The problem is that they’d still owe the builder another $57,600, thanks to the incentive.

Some buyers don’t discover these shortfalls until closing, and then they’re out of luck because they have no more liquid funds to cover the difference.

To protect yourself, Mr. Stillman suggests a simple move. “Make sure you have an ironclad mortgage preapproval before the cooling-off period is over on your purchase contract.”

Don’t hide incentives

Lenders want to know about these incentives because they affect their security – which is the property value minus the mortgage amount. That’s a big deal if you don’t pay your mortgage and they have to liquidate the property.

“The job of an appraiser is to review the purchase contract,” says Leigh Walker of Vancouver-based Lawrenson Walker Real Estate Appraisers. “We turn into a private investigator to determine if there are any buyer incentives,” which developers often bury in an addendum on the last page of the paperwork, he says.

I’ve heard of some condo salespeople who advise buyers to simply not send the addendum showing the incentive to their lender. That way, the lender would lend them more money, they claim. But that’s horrible advice. Those same lenders would promptly sue you if you couldn’t complete the purchase because of a shortfall.

“Make sure the lender is fully aware of all rebates, or you could have an unpleasant surprise at closing,” Mr. Stillman summarizes.

Why the incentive in the first place?

If demand were so strong for a brand-new condo, why would a developer even need to throw out such huge incentives? That’s the question you need to ask as a prospective purchaser.

“The builder will never cut prices, so they go to incentives, which is basically the same thing,” says Jamie Johnston, broker and owner of Toronto-based Re/Max Condos Plus.

But “they generally put incentives on what’s left in inventory, not at the outset of a project,” he says.

“Builders need to sell at least 70-75 per cent of their units to get the financing to start building,” Mr. Johnston says, and “some builders are extremely well funded, while some are not.”

If you see a developer offering juicy incentives on the first units they sell, that could potentially be a red flag, he warns. “They may be trying to get a running start on sales so they can start building,” whereas more established companies like Pinnacle or Tridel “can just start building.”

In a down market, it’s critical that you choose a builder who will complete the project. Barring laws to the contrary, he warns that more and more undercapitalized developers have been taking people’s money and then – a few years later – giving them their deposits back.

Mortgage rates unchanged

It was a sleepy week for mortgage rates. The only changes among nationally advertised offers were a five basis point increase in the lowest variable and 10-year fixed rates. (One basis point is one-hundredth of a percentage point.)

Canada’s bond market, which heavily influences fixed mortgage pricing, is now focused on the May 3 U.S. Federal Reserve rate announcement. If the Fed suggests that a slowing North American economy warrants a pause in hikes, yields could drop and take fixed rates down with them.

But with core inflation remaining so darned sticky, that is anything but guaranteed.

Rates are as of April 20, 2023 from providers that advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20 per cent down payment, or those switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1-million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.

Robert McLister is an interest rate analyst, mortgage strategist and editor of You can follow him on Twitter at @RobMcLister.

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