Construction Financing

Draws, not a lump sum

A construction mortgage advances money in stages against work already completed. A typical schedule funds at roughly the foundation stage, at lock-up, at drywall and finally at completion or occupancy, with an inspection before each advance.

Because the money arrives behind the work, you or your builder must fund each stage first. That cash flow reality, more than the interest rate, is what determines whether a self-build goes smoothly.

During construction most lenders charge interest only on the amount advanced. Once the home is complete and occupancy is granted, the balance converts to a normal amortizing mortgage.

Holdbacks and the lien rules

Ontario's construction lien legislation requires a portion of each advance to be held back for a set period after substantial completion, to protect trades who have not been paid. That holdback is not optional and it is not the lender being difficult.

Plan for it. A build budget that assumes every dollar arrives on the day the work finishes will run short at exactly the wrong moment.

Builder-build versus self-build

If a registered builder with a fixed-price contract is doing the work, lenders are comfortable and terms are better. Tarion registration and warranty coverage on a new home make the file straightforward.

If you are acting as your own general contractor, expect a larger down payment, closer scrutiny of your budget and schedule, and a shorter list of willing lenders. It is achievable, particularly with construction experience, but the financing is priced for the extra risk.

• Fixed-price contract with a registered builder
• Full working drawings, permits and a realistic schedule
• A contingency of at least 10% of the build budget
• Land owned outright, or purchased with the first advance

What the lender needs up front

Approvals hinge on paperwork: the building permit, the signed contract, the detailed cost breakdown, the plans, proof of insurance during construction and an appraisal of the completed value based on those plans.

The completed-value appraisal sets your borrowing limit. If your budget exceeds what the finished home will appraise for, the gap comes out of your own pocket, so it pays to know that number before you break ground.