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No Longer Qualify for a Mortgage on My Pre-Construction Property in Ontario — What Are Your Options?

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Ali Ahmari Moghaddam /
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No Longer Qualify for a Mortgage on My Pre-Construction Property in Ontario — What Are Your Options?

Purchasing a pre-construction property in Ontario often involves a lengthy gap between signing the Agreement of Purchase and Sale (APS) and the final closing date. During that period, circumstances may change, including your ability to secure mortgage financing to complete the purchase. If you no longer qualify for a mortgage at the time of closing, and are unable to complete the purchase transaction, the legal and financial consequences can be serious.

This article outlines the consequences of failing to close due to financing issues and explores practical and legal options available to purchasers under Ontario law.

Legal Consequences of Failing to Close

If you are unable to secure a mortgage and cannot complete the transaction, you are generally considered to be in breach of contract under the terms of the APS. Some of the resulting consequences can include:

Forfeiture of Deposit: The builder is entitled to retain the deposit you had previously paid, as partial compensation for your default.

Liability for Damages: In addition to keeping your deposit, the builder may sue you for damages, including:

The shortfall between your purchase price and the resale price,
Real estate commissions and legal fees associated with re-selling the unit,
Carrying costs or lost profits due to the delayed sale.

Options and Remedies Available to Purchasers

Before resigning yourself to default, you may want to explore the following options instead of default under the terms of the APS:

1. Assignment of Agreement

You may assign your Agreement of Purchase and Sale to another qualified buyer, subject to the builder’s consent and any applicable builder’s fees. This is commonly known as an assignment sale. An assignment can be effective an effective tool to avoid default if market conditions are favourable and the builder permits the assignment taking place.

2. Adding a Co-Purchaser

Some builders may allow you to add another purchaser (such as a family member or investor) to the Agreement. This may improve your eligibility for financing from a lender’s perspective and allow you to proceed with closing.

3. Private or Alternative Financing

If traditional lenders are no longer an option, you want to may consider:

Private lenders,

Using a guarantor or co-signer.

It is important to note that these options usually come with higher interest rates, increased legal work, and increased lending fees, but they may help to bridge the financial gap in order to close the transaction.

4. Requesting a Price Abatement Due to Low Appraisal

If your mortgage financing is denied or reduced because the property has been appraised for less than the original purchase price, you may want to request a price abatement from the builder. This is a reduction in the purchase price to align with the appraised value.

While builders are not legally obligated to agree, some may accept a reduction to preserve the transaction and avoid resale delays or further litigation. Your request should be supported by a professional appraisal and made in writing, ideally through your lawyer.

5. Negotiating a Mutual Release

If you cannot close, you may approach the builder to negotiate a mutual release. This is a formal agreement terminating the contract by consent of both parties. Once again builder’s are not obligated to provide a mutual release, however, depending on market conditions, the builder may agree to refund part or all of your deposit and release you from further obligations. This should always be negotiated through legal counsel.

6. Builder Take-Back Mortgage

Some builders offer vendor take-back (VTB) mortgages—where the builder acts as the lender for part of the purchase price. These can be useful where you qualify for partial financing and need help bridging the shortfall.

7. Reviewing the Tarion Addendum for Termination Rights

All new-build freehold and condominium purchases in Ontario include a Tarion Addendum, which outlines certain procedures for providing notice of delays in closing as well as termination rights:

For residential condominiums, purchaser’s have a 10-day rescission period (following the date your APS is signed and all condominium disclosure documents were provided to you by the builder), which allows you to cancel the agreement and recover your deposit. The purpose of the 10-day rescission period is provide you with ample time to review your APS and condominium disclosure documents in detail and make an informed decision about whether to proceed with the purchase transaction or terminate the transaction.

In certain cases, such as significant construction delays beyond the “Outside Closing Date” (as such term is defined in the Tarion Addendum), the addendum may permit you to terminate the agreement and receive a full refund with interest.

8. Requesting an Extension of the Closing Date

If your financing is still pending or almost approved, you may request a short extension of the closing date from the builder. This can allow time to:

Finalize alternative or private financing,
Liquidate assets,
Complete the sale of another property.

Although the builder is not obligated to grant an extension, many will consider it, especially if it avoids a default. Be prepared to pay interest on the balance due on closing, as well as the administrative and legal fees of the builder associated with the extension. It is important to ensure that the extension agreement and the terms of the extension are documented in writing and reviewed by legal counsel.

9. Exploring Bridge Financing or Porting a Mortgage (for Existing Homeowners)

If you currently own a property and are in the process of selling it, you may explore:

Porting (moving) your existing mortgage to the new property, or
Bridge financing to close the new deal before finalizing the sale of your current home.

These financial tools may help manage short-term liquidity issues and should be discussed with your mortgage broker or bank as early as possible.

10. Submitting a Complaint to Tarion or the HCRA (in Cases of Builder Misconduct)

In rare cases, if the builder engaged in misrepresentation, failed to meet material disclosure obligations, or otherwise acted in bad faith, you may file a complaint with:

Tarion, under the Ontario New Home Warranties Plan Act, or
The Home Construction Regulatory Authority (HCRA), which oversees licensed builders.

If misconduct contributed to your inability to close (e.g., significant delay, failure to disclose material defects affecting appraisal), you may have legal grounds for terminating the agreement or recovering your deposit.

In conclusion, failing to secure mortgage financing for your pre-construction property can result in breach of contract, forfeiture of your deposit, and exposure to further legal claims. However, several practical remedies may be available, including assignment, adding a co-purchaser, requesting an extension, seeking private financing, or negotiating a mutual release. These possible options should be explored promptly and with the assistance of a legal professional.

If none of the options lead to a resolution, it is critical to consult not only with a real estate lawyer but also a litigation lawyer. A litigation lawyer can advise you on the legal consequences of being sued for breach of contract, assess your potential liability, and help you prepare a strategy to minimize exposure. Being informed of your rights and the potential risks before the closing date is key to protecting your legal and financial interests.

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