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Builders' Mortgage Options In Canada 2022

by David Bico on 11 Nov 2022

Builders' Mortgages, or construction mortgages, are designed to help Canadians finance building a new home. Interest is usually only required from you during the construction of the home. Construction mortgages can help you make building a home much easier.

A building loan is sometimes called a draw mortgage. The draw is the process through which the lender provides financing which is then used for paying contractor fees as well as for supplies. Your lender will pay for your lawyers who then give your contractor these funds.

Other lending institutions can only work directly through contractors. Draws are distributed throughout the construction stages. The contractor doesn't get the entire loan in advance for building your home.

In other words, the contractor will be paid in proportion to the house's construction costs. This allows construction loans to be applied to the construction of homes, as needed.

How Do New Construction Loans Work?

Basically, construction mortgages give borrowers access to funds equal to up to 80% of the estimated value of the home. These funds can then be used to pay for the various materials and work needed to complete the construction.

Typically, borrowers will only be required to pay interest on the amount withdrawn during the first 18 months of the construction project, or until the home has been completed.

After completion of the project, the remaining loan becomes a regular mortgage. The interest rate on this mortgage will be equal to the interest rate you agreed upon when you signed the loan contract.

Things To Consider About Construction Loans

Using a builder’s mortgage to construct a new home can be much more stressful than purchasing an existing home. Lenders will require more documentation and info from you, and you will usually be required to provide more money beforehand.

However, there are a few types of builder’s mortgages that can help you in financing a number of different projects. This allows you to use the builder’s mortgage to make decisions that meet your needs when financing construction.

Canadian borrowers can go with either a process draw mortgage or a completion mortgage. It is also possible to use a combination of the two depending on your project and the broker you end up using.

Types of Construction Projects

There are a few types of construction projects that are commonly funded using construction loans in Canada. These include homes built by contractors, homes built by borrowers acting as their own contractors, and newly constructed homes that require more funding.

Contractor Built Home

For a home built by a contractor with your money, borrowers enter into an agreement with a registered contractor in order to get their home built. The contractor will require “financing draws” at various points during the process to finance the building.

Options for funding this type of construction include completion mortgages or progress draws.

Self Built Home

If you have the skills and resources to build your own home, then you can act as your own contractor and hire tradesmen to assist you in building your own home. Details about draw requirements for this type of project will be discussed later in this article.

Options for funding this type of construction include completion mortgages or progress draws.

New Construction Home

This is a fairly common situation in which a construction loan can help you. If your home is newly constructed, but you require funds after the construction is completed, then you can use a construction mortgage to obtain these funds.

Completion mortgages can be used for funding this type of construction.

How Do I Know How Much to Borrow?

Do you know how much money you will need in the future?  In paying monthly mortgage payments that are within the budget, and during construction, you will incur additional costs. It’s important to consider these potential expenses when going with a builder’s mortgage.

Construction loans only cover land and construction costs, not living expenses during the construction of the property. Understanding the things that can be purchased with builder’s mortgage funds is essential to using them successfully.

One important aspect of understanding how much to borrow is the draw schedule. The draw schedule will have milestones that, when reached, will require a progress inspection. Based on the progress, the draw amount will be established and provided to your lawyer.

The lawyer will then pay your contractor or provide you with the funds (if you are acting as your own contractor) on your behalf. Banks will not deal with your contractor directly, they will always act through your lawyer.

Construction Loan Eligibility

Compared to traditional mortgage down payments, construction loans often require you to spend more money upfront. Contrary to conventional mortgage loans, the collateral is unfinished, and thus the loan requires some extra information.

Because construction loans are less costly in total than completed homes, construction loans are more vulnerable to scrutiny from lenders. Your lender can assess your income, debt, and credit scores. Conversely, construction financing requirements require fewer fees.

Generally, you can expect to have more stringent requirements to qualify for a construction loan compared to a traditional mortgage. However, shopping around with different brokers and lenders will give you a higher chance of finding something that works for you.

What Projects Are Not Eligible For a Construction Loan?

When the construction of your house is funded by developers and builders you can get your house from this contractor and not need the construction financing. If your first home is sold you will follow similar procedures.

Some banks offer no construction loans on condominiums or cooperative apartment buildings and no construction loans through the federal government. Lenders also sometimes give loans to businesses building new homes.

The costs of permanent elements such as appliances and landscaping are also typically eligible for inclusion in your construction loan. For more information on the specifics, it’s important to be thorough when considering things with brokers and lenders.

What Is The Best Type of Construction Loan?

Construction loans have a unique appeal for first-time homebuyers and experienced homeowners. What projects would be good candidates for building loans? Finding a local mortgage lender for you to begin your mortgage search is essential.

At the end of the day, the best type of construction loan will depend on the nature of your project, as well as things such as the contractors and properties available in your area, as well as the loan amount for which you qualify.

Construction loans are harder to find than conventional mortgages. Start with your local bank where you already have a relationship. Also speak with other local banks, including community banks, credit unions, and cooperative banks.

Construction Draw Schedules

Detailed drawings outline payment dates for construction work. Upon completing construction, the construction company will negotiate a schedule. Depending on the bank's standard drawing schedule you may offer a flexible payment schedule to the bank.

The delays or charges may vary depending on the construction project and its duration. Construction drawings are usually based upon milestones like when the roof or foundation are completed or an aggregate percentage.

Interest will accrue only after each draw has been paid. As a borrower, the best way of obtaining the draw is to avoid paying interest during construction.

How Do I Apply for a Construction Mortgage?

The application process for a new construction loan resembles that of purchasing a new house. If necessary we may also look at your purchase order plan, specifications, and other items to get approval for the project from the builder.

If you are preparing your mortgage application, a mortgage loan officer may be able to help. However, no matter how you approach the process, there are a few consistent steps you can expect to go through:

  • Submitting the application for a construction loan and determining what you qualify for. When you send in your application, your broker will determine how much of a loan you can get. This will often involve detailed meetings and dialogues, as well as a review of your options at this point in the process.
  • Securing the property and team of labourers that can help you realize your vision. Once your application is approved, you can look for the property and contractors that are best qualified to make your dream a reality.
  • Getting an appraisal for your project costs and value. Once you have your property and team set up, the next step is the appraisal. This is where you will determine the estimated total cost for your project, as well as the value of the completed property.
  • Looking over and selecting offers based on your qualifications and specifications. Different lenders will give you different interest rates depending on your appraisal, as well as other factors.

 

How Much Down Payment Do I Need?

In order to qualify for construction financing in Ontario, borrowers must make a down payment. The amount varies depending on the lender and loan type but is typically 20% or more of the project's total cost.

This implies that the borrower will need to have their own resources to be sure they can afford to repay the loan. The exact amount of down payment required will depend on the cost of your project and how you intend to spend the money.

You will also be required to disclose a credit report and the specifics of your credit score. Lenders will evaluate this information as well as other factors in order to determine how much you need to pay up-front.

Construction Mortgages With Private vs Traditional Lenders

Typically the traditional bank has a strict schedule with 1-5 draw outs to complete. They will check all the documents and order inspections to make sure the locking phase was done successfully.

Private lenders make excellent candidates for many construction mortgages, but they may not be the ones you choose for your permanent mortgage once your home is built. Generally, it is easier to get loans through a private lender.

Once you've settled into your house, you'll typically switch to a regular lender, who will give you a loan with long-term interest rates that are lower than those of private lenders. In the end, it will depend on your exact circumstances, and shopping around is a good idea.

Reviewing Your Financing Options

Private lending providers provide a surprisingly greater flexibility when selecting borrowers for construction loans. But they also generally pay higher fees than other types of lending. Below are the different ways to finance a construction loan.

Conversely, traditional lenders will give you more reasonable fees and interest rates, but they will have more stringent requirements when reviewing your qualifications, assessments, and other documentation.

At the end of the day, what’s best for your project will depend on the exact nature of what you expect to build, and how much the appraisal says it will cost to build. The value of the completed property will also come into play.

Getting a Construction Loan to Build or Renovate Your Home

Building Loans can cover cost-effective construction for new home construction and renovation. Understanding construction loans help you determine the right loan option to finance your project. Online loan services.

If you are not constructing a new home, and instead simply wish to renovate your existing loan, then there might be other options that are a better fit compared to a builders loan. These include homeowner renovation loans, as well as other options.

What Documents Are Required to Apply?

Apart from several specific documents, the process of applying for loans for building works is not varied from province to province. If you are interested in a builders loan, you will generally require:

  • Essential information on your debts, income, and assets.
  • A signed contract from your builder, developer, or contractor detailing the various details of your loan requirements.
  • Financial statements, licenses, and insurance information for the builder.
  • If you wish to act as your own contractor, you will need to prove that you are skilled and qualified to do so.

 

The Steps to a Successful Building Experience

Construction mortgages follow specific steps that set the foundation for the right outcome:

  • Determine the project resources required.
  • Establish the benchmarks needed to accurately evaluate your draw schedule.
  • Create an effective and reliable stream of communication for developers, contractors, and lenders.
  • Be scrutinous about the realism of the project design and construction.
  • Pay attention and make sure everything is going according to plan.

 

Making The Construction Mortgage Process Easier

There are also a few things you can do to make sure that your builder’s mortgage application goes smoothly:

Find The Right Broker

Using a mortgage broker can give you a lot of options you would not otherwise have. Brokers are generally prepared and have the connections necessary to find you the best deals and give you the best options.

Shop Around

Consulting with different brokers and lenders will give you a better idea of what you can expect when going into a builder's loan. If you only check with one broker, you may not be getting the whole picture.

Be Prepared

Make sure you have breathing room in case unexpected expenses crop up during construction. It’s also important that you thoroughly examine any stipulations in your loan contract and other details which may end up surprising you down the line.



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