Construction Financing Canada

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 Construction Financing 

If you have purchased a home before, you probably have first hand experience with the process of getting approved for a mortgage. However, if you’re building a home, the process is a little bit different. Mortgages for construction financing (also called self-build mortgages) differ from mortgages for existing homes, so it helps to understand more about them before you begin the process.

Construction Financing: Types of New Construction Mortgages 

There are actually three categories of new construction financing, each of which comes with its own specific stipulations, requirements, and mortgage options:

Type of Construction

What It Means

Mortgage Options

Self-Build Home

You are the contractor for the home. You hire your own subcontractors to get the job done.

Progress Draw Mortgage or Completion Mortgage

Self-Build: Builder/Contractor

Also called "turnkey", you enter into an agreement with a contractor to build your home.

Progress Draw Mortgage or Completion Mortgage

Buying From a Builder

Also called "take out", usually relevant to condominiums, town homes, and newly constructed homes. You will not be required to pay until the home is complete

Completion Mortgage

 

As you can see from this table, you will typically be able to get either a progress draw mortgage or a completion mortgage. So what do these mortgage options mean for you?

Construction Financing via Progress Draw Mortgage 

With a progress draw mortgage, you’ll be approved for the full amount of your mortgage loan to build your home. However, the funds will not be dispersed to you all at once. Instead, the funds will be advanced to you in intervals as the house is built. In general, you’ll get three draws on the mortgage. The first will typically be 35%. The second will take you up to 65%, and the third will take you to 100% of your mortgage loan. For this to occur, a couple of things have to happen:

  • You need to get a progress inspection report before each draw, detailing the percentage of work that’s been completed with the previously drawn funds.
  • You won’t get the final advance until a final inspection is performed to prove that the building has been completed and you’ve signed the final mortgage documents.

Construction Financing via Completion Mortgage 

With a completion mortgage, you won’t need the funds for the property until it’s already been completely built. Since you won’t be doing the building, you won’t need the funds to complete your home until it is finished. You will, however, have to make a down payment on the property when you make your offer to purchase, and then you may need to make your full down payment in installments as the house is being built.

For example, if you are buying a house that’s worth $300,000, you’ll likely have to make your full $20,000 down payment in four installments:

  • $5,000 At time of offer to purchase
  • $5,000 after 30 days
  • $5,000 after 60 days
  • $5,000 after 90 days.

Then, when the building is completed, the full amount of the mortgage loan will be released to the builder. In this case, that will be $280,000, which you will then make monthly payments on until you’ve paid off your home.

As you can see, getting a mortgage when building a home is a bit different from getting a mortgage when buying an existing home. If you are buying a home from a builder, the process is closer to getting a traditional mortgage for an existing home, but instead of paying your down payment all at once when you close on the property, it will be divided over the time that the house is under construction. Understanding the difference between these types of mortgages will make the process of building or purchasing your new construction  home much easier and smoother.