Direct answer
The buyer signs a fixed-price agreement conditional on legal review and on obtaining a CMHC certificate of insurance, stages a 5% deposit, pays the per-unit CMHC application fee and legal costs, and funds the insured mortgage at completion. The mortgage equals the price less the deposit, the premium is added to the loan, and any builder closing allowance is paid to the buyer on closing under a rebate agreement. The rate is a projection off the Canada Mortgage Bond yield until the lender commits.
Key facts
- The agreement is conditional on legal review and on obtaining the CMHC certificate of insurance; the deposit is returned if either fails.
- Cash advanced before funding: 5% deposit staged, the per-unit CMHC application fee, legal costs. Liquidity and net worth are demonstrated, not spent.
- Mortgage equals price less the 5% deposit; the premium is added to the loan; the pre-commitment rate is a projection off the CMB 5-year yield.
- An appraisal guarantee makes a low appraisal reduce the price rather than increase the buyer's equity.
Step one: the agreement
The purchase price is fixed through closing. The agreement is conditional on the buyer's legal review and on obtaining the certificate of insurance; if either fails, the deposit is returned. The deposit is staged: an initial amount on signing, the balance to 5% when the conditions are waived. Completion dates are targets, not guarantees, which is why we prefer projects where at least one block is already complete.
Step two: the cash the buyer actually advances
Before funding, the buyer advances the 5% deposit, the CMHC application fee charged per unit, and legal costs. Nothing else is required of a qualified buyer in a takeout structure. Liquidity and net worth are demonstrated, not spent. Where the builder provides a closing fee allowance, it is paid to the buyer by cheque on closing under a builder rebate agreement, so the buyer's net equity after closing can be far below the gross deposit.
Step three: sizing the loan
The mortgage is the purchase price less the 5% deposit. The CMHC premium is a percentage of that mortgage and is added to the loan rather than paid in cash. The total loan therefore slightly exceeds the mortgage, and on a building where the price already includes the closing allowance, the total loan can approach the purchase price. The interest rate shown in a pro forma before commitment is a projection based on the Canada Mortgage Bond 5-year yield; the committed rate is set by the lender near completion.
Step four: the points and the covenant
The structures we arrange target the top MLI Select tier through the affordability criterion, which carries a commitment on a share of units for a defined period, typically ten years. That covenant travels with the certificate of insurance. Rents on the affordable units are set relative to a threshold tied to local median renter income; in the markets we underwrite those rents are typically close to market for the unit types involved.
Step five: appraisal, income and funding
The lender orders an appraisal, which also supplies the rental comparables supporting the pro forma rents. We require an appraisal guarantee from the builder: if the appraisal comes in below the purchase price, the price is reduced by the difference rather than the buyer adding equity. The lender underwrites the ongoing net operating income after any first-year incentives expire, and the coverage ratio it uses is the one based on that ongoing income. The mortgage advances on completion; if leases lag the underwritten income, a holdback may apply.
What the buyer bears
Rent risk after completion, delivery timing, and the rate at commitment. Rate increases can require a buydown or additional equity at closing. The buyer can lose the deposit if the certificate of insurance cannot be obtained through the buyer's own fault, for example a misstated net worth or liquidity. The provincial new home warranty applies to the completed building. Legal costs vary and counsel licensed in the property's province is required to close.
Questions
Is the closing fee allowance a price reduction?
No. The purchase price, and therefore the mortgage, includes it. It is paid back to the buyer on closing under a builder rebate agreement, which is why it lowers net equity without lowering leverage. Review the tax treatment with your accountant.
Who provides the rent comparables?
The appraisal ordered by the lender. We set pro forma rents to what the appraisal can support, not the other way around.
Can the completion date slip?
Yes. Builders provide anticipated completion dates, not guarantees. Delay costs the buyer time, not money, in a takeout structure, but it extends exposure to the rate at commitment.
Sources
MLI Select: multi-unit mortgage loan insurance,
Canada Mortgage and Housing Corporation (CMHC)
Canada Mortgage Bonds program,
CMHC
Standard underwrite model (this site),
Daniel Kim & Associates
Related pages
Reference material prepared by Daniel Kim & Associates, Sotheby's International Realty Canada. Not a recommendation to buy any property or security. Figures are illustrative and reviewed quarterly; complete independent due diligence with your counsel and accountant.
All reference pages