It’s standard for residents to take out a mortgage to purchase their first house and preceding ones, but what about if you plan on building the house of your dreams from the ground up? Well, I’m here to tell you that it’s completely possible to get financing for building a house — the construction mortgage. I’m Jodi Habel, a mortgage broker based in Ontario with over 15 years of experience in the field and just the person to talk to regarding all mortgage-related processes in Canada. Wondering “how is a construction loan different from a mortgage?” or “how do construction mortgages work in Canada?”. Let’s look at what exactly a construction mortgage entails and, of course, how I can be of help to you.
What is a Construction Mortgage?
A construction mortgage is also referred to as a builder’s mortgage or a construction loan and is a sum of money provided from a lender to a borrower to be repaid in small installments with the addition of interest. Builder’s mortgages in Ontario are quite versatile and can be used towards building your home from the ground up (even starting from acquiring the land), for renovations, and building vacation homes. Before you begin seeking a construction mortgage, it’s vital to discuss your plans with a licensed contractor or builder for accurate estimates regarding the specific materials, resources, labour, and more that will be required. You will need to approach the process with as much accurate information as possible to avoid miscalculations and understand how much money you will be applying for.
How Do New Construction Loans Work?
Getting a mortgage for new construction differs ever so slightly from the all too familiar conventional mortgage. Construction loans are also referred to as construction draw mortgages due to their unique approach to receiving the approved sum of money. That is because, with builder’s mortgages, your loan sum is paid in what is known as “draws” throughout the construction process. Draws are certain percentages of the overall mortgage sum you are approved for paid to the borrower from the lender to carry out each phase one after the other. For example, you may receive a certain percentage of your overall sum during the first draw that will be allocated to purchasing the land (if you do not own it yet). The second draw will be allotted to setting up the foundation of the house, and so on. The number of draws you are given along with their corresponding sums depends on your lender.
Construction Mortgage Eligibility
The eligibility requirements for a builder’s mortgage in Canada are similar to the qualification process of first-time homebuyers’ mortgages. . Not every bank or lender provides this type of financing because of the extra administration involved. Step one is acquiring the land. Lenders consider financing between 50% to 80% of the land value in the first draw. Step two is the construction financing portion. Each lender is different in their policy as some will put you into a regular type mortgage from day one while others will use a line of credit product during the construction phase and then switch you over into a more standard type mortgage once construction has been completed. Construction periods range depending on the lender from 6 months to 1 year. You can have a builder complete the process with you or you can also build the home yourself or a combination of both. The advances are typically structured as follows once the land has been acquired (if needed):
1st advance – construction at least 15% complete – when excavation, backfill, and foundation have been completed;
2nd advance – construction at least 35% complete – when the home is completely closed in or “roughed in”. The foundation, sub-floor, framing, sheathing, roof, roughed-in electric, and plumbing have been completed/installed;
3rd advance – construction at least 65% complete – when the interior is complete to the drywall stage (taped and finished). This should include exterior completion, pouring of the basement floor, and installation of heating;
4th advance – construction at least 97% complete – the structure must be fit to be occupied and have finished interior doors, floors, carpentry, painting, heating, plumbing, electrical, walls, and driveways (subject to the season of course)
Your solicitor will be instructed to hold back a percentage of each draw to meet the Provincial requirements. These funds are normally released after the solicitor confirms that the construction lien period has expired. The percentage of holdback required and the length of time that it is held is 10% for 45 days.
It is important to consider all aspects of the process and have a contingency fund set aside for unexpected costs that may arise. . Your credit score, income amount, and assets information are customary with any mortgage you will apply to. Additionally, the construction mortgage down payment is most often 20% but can be completed with as little as 5% down payment which makes construction mortgages a great choice in a competitive market for first-time homebuyers.
Please contact me, Jodi Habel, to make acquiring your construction mortgage in Ontario smoother than you can imagine. After all, it may be your first time opting for a builder’s mortgage, but I have acquired relationships with major banks, credit unions, monoline, and alternative lenders through my 15 years of experience working in the industry in Canada.