Cholesterol plays an important role in regulating the properties of phospholipid membranes. To obtain a detailed understanding of the lipid–cholesterol interactions, we have developed a mesoscopic water–lipid–cholesterol model. In this model, we take into account the hydrophobic–hydrophilic interactions and the structure of the molecules. We compute the phase diagram of dimyristoylphosphatidylcholine–cholesterol by using dissipative particle dynamics and show that our model predicts many of the different phases that have been observed experimentally. In quantitative agreement with experimental data our model also shows the condensation effect; upon the addition of cholesterol, the area per lipid decreases more than one would expect from ideal mixing. Our calculations show that this effect is maximal close to the main-phase transition temperature, the lowest temperature for which the membrane is in the liquid phase, and is directly related to the increase of this main-phase transition temperature upon addition of cholesterol. We demonstrate that no condensation is observed if we slightly change the structure of the cholesterol molecule by adding an extra hydrophilic head group or if we decrease the size of the hydrophobic part of cholesterol.