Canadian lenders have found a creative solution to a messy problem. When pre-construction condo buyers can't come up with enough equity to close their deals because prices have fallen, banks are increasingly using blanket appraisals to make the numbers work. Instead of appraising properties at current market value, they're backing mortgages based on the original contract price.

The result? Buyers are closing on properties with little to no actual equity, holding loans that may exceed what their homes are worth. And Canada's banking regulator knows it's happening.

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What Blanket Appraisals Actually Are

A blanket appraisal assigns a single value to multiple new construction homes, validating the contract price rather than the current market value. It's a shortcut that skips the hard question of what the property is actually worth today.

Here's how pre-construction financing normally works. When you buy a pre-construction condo, you don't get a home right away. You get an assignment, the right to purchase a future home. You follow a deposit schedule while the building goes up, but you don't need to qualify for a mortgage yet.

Only when the unit is completed and ready to transfer do you need to cover the full purchase price. Most buyers use a mortgage for that, and lenders will finance up to 80% of the appraised value. That means you need at least 20% equity in the property.

In a rising market, that's easy. During Toronto's 30% price surge in 2017, buyers often encouraged regular appraisals to lock in unrealized gains as equity. Blanket appraisals weren't needed because appreciation covered any gap between the contract price and market value.

When prices fall, it gets messy. A 20% drop means the buyer's deposit is gone, and they need to top up the shortfall to reach that 20% equity requirement based on the current appraisal.

Unless, of course, the bank decides to use the original contract price instead.

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Why This Started Happening Now

Most condo apartments take at least three years from pre-sale to completion, longer when demand slows. The low-rate speculative boom didn't start delivering completions until 2023, about a year after prices peaked.

That timing created a problem. Units that were purchased at peak prices in 2020 and 2021 were finally ready to close in 2023 and 2024, after the market had cooled significantly.

Reports earlier this year noted that blanket appraisals are being used to keep deals from collapsing. Instead of using current values, some major banks are backing loans based on the purchase price.

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The Regulator Knows, But Doesn't Seem Worried

Canada's banking watchdog, OSFI, flagged its concerns on blanket appraisals earlier this year. They're worried about the "mismatch in timing between the blanket appraisal and property values at the time the mortgage closes."

Translation: they know lenders may be using appraisals that don't reflect current market conditions. If the collateral isn't worth what the appraisal says, lenders could face bigger losses.

But OSFI considers this a material issue, not a critical one, based on volume. They estimate that just 1.2% of mortgage originations between 2022 and 2024, and 1.4% of total outstanding mortgages as of February 2025, were for newly completed condo apartments.

That sounds small. But mortgage debt isn't evenly distributed across Canada. Nearly one in four mortgage dollars, 23%, are tied to Toronto, the market that led the boom and has seen significant price adjustments since.

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Toronto Is Ground Zero

In the 12 months ending in September, Toronto accounted for 45.4% of all condo completions in Canada. Year-to-date, completions are equivalent to roughly 60% of Toronto Regional Real Estate Board home sales. That's massive.

If Toronto's new home completions were their own real estate board, they'd rank third in Canada, behind only Toronto's existing home market and Montreal.

The challenge continues. Toronto, North America's high-rise crane capital, had roughly 92,000 new homes under construction in September. That represents a significant volume of future closings.

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This Isn't Just About First-Time Buyers

Pre-construction purchases are heavily investor-driven, especially in Toronto, where they make up 70% of the market. Many investors didn't plan on closing or having to qualify for financing. They were hoping to flip the assignment before completion.

Despite the narrative around helping first-time buyers, the data suggests a different story. When 30-year amortizations were announced for first-time buyers, they were quietly extended to investors just days later.

Values are set by the marginal buyer. Appraisals reflect recent comps, not the purchase and resale of every unit over time. For 30-plus years, this worked as prices climbed. On the way down, the dynamics shift.

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The Price Gap Is Substantial

In Toronto, a typical resale condo was just 47.2% of the price of a new build in August. For peak buyers, it's 38.8%. New units typically carry a premium, but that's a significant gap.

Buyers who close on these properties may find themselves holding investments where the mortgage balance exceeds the current market value. To exit, they need to sell that unit into the existing home market, where prices are substantially lower than what they paid.

Buyers who fail to close breach the contract. They lose their deposit and may be held accountable for any shortfall on the resale, plus legal and carrying costs.

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Understanding the Risk Transfer

Blanket appraisals help facilitate closings by using the contract price rather than current market value. This shifts the risk profile from developers to individual buyers.

When buyers close on properties using these appraisals, they're taking on mortgages based on prices that may not reflect current market conditions. If they need to sell, they're competing against resale condos priced significantly lower.

Foreclosures are relatively rare in Canada. Lenders more commonly use Power of Sale, which allows them to sell a property without assuming title. Unlike foreclosures, which are final on the property's transfer, a Power of Sale allows the lender to pursue the borrower for any shortfall between the sale price and the outstanding mortgage balance.

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What This Means for Buyers

If you bought a pre-construction condo at peak prices, the current market value might be lower than what you paid. The mortgage you're closing with could exceed the property's current market value.

If you need to sell, you're competing against resale condos priced substantially lower. If you can't make the payments and the property goes to Power of Sale, the lender can pursue you for the difference between what they sold it for and what you owe.

For buyers who thought they were investing in their future, this creates a challenging situation. You may be locked into a property that's difficult to keep and difficult to sell at a price that covers your mortgage.

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The Bigger Picture

This represents a shift in how risk is distributed in the mortgage market. Blanket appraisals allow deals to close that might otherwise fall through, but they do so by transferring risk from developers to individual buyers.

It's happening with the regulator's knowledge. OSFI has acknowledged the practice but considers it a manageable issue based on national volume.

The challenge is that normal homebuyers tend to do everything they can to avoid defaulting. They'll make sacrifices, cut spending, and work extra hours to keep making payments. That makes them more likely to absorb losses that might otherwise flow back to lenders or developers.

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What Happens Next?

Toronto has 92,000 new homes under construction. As those units complete and close, more buyers will face similar situations. Contract prices from 2021 and 2022 may not reflect market conditions in 2025 and 2026.

Banks are likely to continue using blanket appraisals where they make sense from a risk management perspective. Developers complete their projects. Buyers close on properties. And the regulator monitors the situation.

The risk doesn't disappear. It shifts from developers to individual buyers who may be less equipped to handle it. And when market conditions challenge those buyers, the losses get distributed across thousands of individual mortgages instead of concentrated in a handful of large projects.

That might look like a more diversified risk from a system perspective. But for individual buyers holding mortgages on properties worth less than they paid, it's a personal financial challenge that could last years.