A Guide to Financing
Your Construction Project

For a family building their custom dream home or an investor looking to build a multi-unit property or an infill project, starting construction on a new property is an exciting time.

However, when starting from scratch, the process of obtaining a mortgage is quite different than with an older, existing home or building. With that being said, to help ensure you have all the proper tools for financing your next construction project, we’ll break down everything you need to know about construction mortgages so you can go into this exciting process fully prepared for what’s to come.

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A Guide to Financing Your Construction Project

Floorplans and blueprints for a house

For a family building their custom dream home or an investor looking to build a multi-unit property or an infill project, starting construction on a new property is an exciting time.

However, when starting from scratch, the process of obtaining a mortgage is quite different than with an older, existing home or building. With that being said, to help ensure you have all the proper tools for financing your next construction project, we’ll break down everything you need to know about construction mortgages so you can go into this exciting process fully prepared for what’s to come.

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What A Progress Draw
Mortgage Schedule Usually Looks Like

Here is an example of a draw schedule lenders may use when approving a construction mortgage:

Mortgage Draw 1

  • Excavation, footings, and foundation – 12%
  • Damp proofing, weeping tile, and backfill – 2%
  • Framing, sheathing,
    and roofing completed – 17%

Mortgage Draw 2

  • Exterior doors and windows installed – 3%
  • Roughed-in electrical – 3%
  • Roughed-in plumbing and floor drains – 2%
  • Roughed-in heating – 2%
  • Insulation and vapour barrier – 2%

Mortgage Draw 3

  • Exterior finish (siding/stucco, trim) – 12%
  • Interior walls and ceiling finish – 8%
  • Finish carpentry (trim, cabinets placed) – 11%
  • Heating equipment complete – 5%
  • Electrical complete – 1%

Mortgage Draw 4

  • Plumbing complete – 4%
  • Basement floor placed – 3%
  • Painting complete (interior and exterior) – 5%
  • Interior doors – 2%
  • Floors finished – 3%
  • Walks and driveways – 1%
  • Grading, site improvement – 2%

Takeout

  • Occupancy permit acquired – 100% completed

What A Progress Draw
Mortgage Schedule Usually Looks Like

Here is an example of a draw schedule lenders may use when approving a construction mortgage:

Mortgage Draw 1

  • Excavation, footings, and foundation – 12%
  • Damp proofing, weeping tile, and backfill – 2%
  • Framing, sheathing, and roofing completed –17 %

Mortgage Draw 2

  • Exterior doors and windows installed – 3%
  • Roughed-in electrical – 3%
  • Roughed-in plumbing and floor drains – 2%
  • Roughed-in heating – 2%
  • Insulation and vapour barrier – 2%

Mortgage Draw 3

  • Exterior finish (siding/stucco, trim) – 12%
  • Interior walls and ceiling finish – 8%
  • Finish carpentry (trim, cabinets placed) – 11%
  • Heating equipment complete – 5%
  • Electrical complete – 1%

Mortgage Draw 4

  • Plumbing complete – 4%
  • Basement floor placed – 3%
  • Painting complete (interior and exterior) – 5%
  • Interior doors – 2%
  • Floors finished – 3%
  • Walks and driveways – 1%
  • Grading, site improvement – 2%

Takeout

  • Occupancy permit acquired – 100% completed

Hand reaching for a calculator

What is a Construction Mortgage?

A construction mortgage, also known as a Progress Draw Mortgage, is a loan where the borrowed funds are used to help finance the construction of a brand-new home or building. The funds will be released to you in installments, also known as ‘Draws’ as construction progresses. The draw schedule is based on the percentage of construction that has been completed. The status of construction will be determined by a progress inspection completed by the original appraiser.

Things to Keep In Mind

During the construction process, you will only pay interest on the total mortgage amount you have received. This interest cost is usually deducted from the progress draw. Once the final draw has taken place, you will begin to make mortgage payments on both the principal and interest.

It’s also important to note that each draw will have a hold-back equal to 10% of the draw, which will be held by your lawyer’s office. These sums of money will be released to you 60 days after you have obtained your occupancy permit, so long as the property is at least 98% complete and has been inspected and reported by the original appraiser.

You must also obtain All-Risk Builders Risk Insurance and maintain the coverage throughout the entire construction period.

Also remember that you must ensure all municipal building inspections have been completed and receive approval by your local municipality.

How Many Draws to Expect

In terms of the number of draws, construction mortgages tend to be quite flexible.

With many lenders, there can be unlimited amounts of construction draws. However, the standard is often 4 to 5 draw phases throughout the construction process, including financing the land.

The draw schedule is also pretty flexible, but in most cases, draws are completed around 45 days apart.

What is a Construction Mortgage?

A construction mortgage, also known as a Progress Draw Mortgage, is a loan where the borrowed funds are used to help finance the construction of a brand-new home or building. The funds will be released to you in installments, also known as ‘Draws’ as construction progresses. The draw schedule is based on the percentage of construction that has been completed. The status of construction will be determined by a progress inspection completed by the original appraiser.

Things to Keep In Mind

During the construction process, you will only pay interest on the total mortgage amount you have received. This interest cost is usually deducted from the progress draw. Once the final draw has taken place, you will begin to make mortgage payments on both the principal and interest.

It’s also important to note that each draw will have a hold-back equal to 10% of the draw, which will be held by your lawyer’s office. These sums of money will be released to you 60 days after you have obtained your occupancy permit, so long as the property is at least 98% complete and has been inspected and reported by the original appraiser.

You must also obtain All-Risk Builders Risk Insurance and maintain the coverage throughout the entire construction period.

Also remember that you must ensure all municipal building inspections have been completed and receive approval by your local municipality.

How Many Draws to Expect

In terms of the number of draws, construction mortgages tend to be quite flexible.

With many lenders, there can be unlimited amounts of construction draws. However, the standard is often 4 to 5 draw phases throughout the construction process, including financing the land.

The draw schedule is also pretty flexible, but in most cases, draws are completed around 45 days apart.

Construction worker looking at floorplans

Other Important Considerations

Saving Up For a Down Payment

When planning on constructing a brand-new home, it’s important to consider that the minimum down payment is 20% of the lot value and most often 35% of the lot value. In the end, most lenders will finance 80% of the future value, but this is based on equity that you have built during your construction.

Obtaining Construction Mortgage Approval

As with any loan, you will need to provide lenders with accurate, up-to-date information regarding your income, debts, and assets, and be able to prove that you have the financial means to make payments and are low risk of defaulting.

Working With a Qualified Builder

To obtain approval for a construction loan, it is recommended that you work with a “qualified builder” who has experience constructing new homes.

This can be yourself or a:

  • Residential Home Builder
  • Licensed General Contractor

If working with a general contractor, signing a construction or purchase contract with your builder
or developer that you can provide to your lender is also required. This contract will detail certain aspects regarding the construction project that can impact your loan. This includes:

  • How much money the contract is for, including construction and cost of land
  • The start and completion dates for construction

Other Important Considerations

Saving Up For a Down Payment

When planning on constructing a brand-new home, it’s important to consider that the minimum down payment is 20% of the lot value and most often 35% of the lot value. In the end, most lenders will finance 80% of the future value, but this is based on equity that you have built during your construction.

Obtaining Construction Mortgage Approval

As with any loan, you will need to provide lenders with accurate, up-to-date information regarding your income, debts, and assets, and be able to prove that you have the financial means to make payments and are low risk of defaulting.

Working With a Qualified Builder

To obtain approval for a construction loan, it is recommended that you work with a “qualified builder” who has experience constructing new homes.

This can be yourself or a:

  • Residential Home Builder
  • Licensed General Contractor

If working with a general contractor, signing a construction or purchase contract with your builder or developer that you can provide to your lender is also required. This contract will detail certain aspects regarding the construction project that can impact your loan. This includes:

  • How much money the contract is for, including construction and cost of land
  • The start and completion dates for construction

Male construction worker wearing a hardhat speaking with a woman

If you are not using a general contractor, you will need to provide quotes for the work you plan to complete. For example, you may have many different quotes for every aspect of the build, including:

  • Plumbing
  • Heating
  • Flooring
  • Foundation

The Importance of Working With a Mortgage Broker

When it comes time to start shopping around for a construction mortgage, be sure to work with an experienced mortgage broker with the knowledge and expertise to help you navigate the process and find you the best financing option for your needs.

Ready to get started?

Our team would be more than happy to help guide you through this next exciting step.

Contact the Chris Allard Mortgage Team Today!

If you are not using a general contractor, you will need to provide quotes for the work you plan to complete. For example, you may have many different quotes for every aspect of the build, including:

  • Plumbing
  • Heating
  • Flooring
  • Foundation

The Importance of Working With a Mortgage Broker

When it comes time to start shopping around for a construction mortgage, be sure to work with an experienced mortgage broker with the knowledge and expertise to help you navigate the process and find you the best financing option for your needs.

Ready to get started?

Our team would be more than happy to help guide you through this next exciting step.

Contact the Chris Allard Mortgage Team Today!
A young man and woman sitting across from a businessman looking at floorplans

Frequently Asked Questions

Eligibility requirements are typically stricter than regular mortgages because the collateral for construction mortgages is an unfinished home, which is riskier for lenders. As a result, your lender will evaluate your current income, debt, and credit score and require detailed construction plans and a budget for the project. The clearer and more accurate your budget, the more likely you’ll get approved. Rest assured, if the project makes sense, we will have a solution to help you complete your build.

A construction loan allows you to borrow money to build your home, whether you do it yourself or with a contractor. In most cases, you can borrow up to 80% of the future value of the home.

You don’t get an upfront lump sum as you do with a conventional mortgage, but instead, you receive payments for each draw schedule (or construction plan). In other words, you or the contractor will receive money contingent on the completion of the project. While some lenders offer unlimited draw schedules, the standard is often four to five draw stages, which includes land purchases if you haven’t done this already.

Construction mortgages require a down payment and come in fixed or variable-rate options, which means you will need to make monthly payments while completing the project. If you already own the land, you may not need to come up with any more funds as a down payment.

A construction mortgage schedule (or draw schedule) outlines when payments will occur based on timelines of completion and the costs associated with each stage of the project. Each draw schedule must outline the work to be done and the completion rate. For example, if your third draw outlines finishing plumbing, wiring, and drywall, the project might progress to 65% completion.

Additionally, each schedule is generally completed 45 to 60 days apart and you or your contractor will receive the money installments with the corresponding draft. The norm is for the borrower to receive funds based on the percentage completed of the project.

Lenders also require a progress inspection from an appraiser for each draw, which you are responsible for paying out of pocket.

During construction, some lenders don’t require that you make any scheduled payments. These lenders most commonly deduct the accrued interest payment from each mortgage advance. On the other hand, other lenders may require that you keep up with regular payments. Additionally, some may offer interest-only payments during construction, but you must make both principal and interest payments upon completion.

It depends. At the moment, many self-built homes cost much more than buying a new home because the cost to build has increased drastically. Keep in mind that you need to pay for certain expenses that don’t add value. This includes but is not limited to: a plot of land, excavations, permits, inspections, building materials, labour, and other related costs.

Additionally, whether a self-build is cheaper can depend on the home you’re using for comparison. For example, if you buy a house that needs lots of costly renovations, you may be better off building your own from scratch.

Yes, there are construction mortgages at reduced rates, but it depends on whether you can afford both loan payments. Your lender will assess your debt and income before approving you for a construction mortgage while you have an existing mortgage. There are also construction mortgages adjudicated on the viability of the construction project and exit strategy.

When construction is complete, the construction loan must be paid in full or refinanced as a regular mortgage.