How Does a Construction Mortgage Work in Canada?
If you're considering building a custom home in Canada, you might be wondering how to finance it. One option is a construction mortgage, also known as a builder's or draw mortgage. This type of mortgage allows you to borrow the money you need to build your home, even if it doesn't exist yet.
Key Takeaways
A construction mortgage allows you to borrow money to build your home.
You'll receive the loan in stages as the construction progresses, paying interest only on the portion you've used so far.
Once the home is complete, you'll convert the construction mortgage into a traditional mortgage.
What Is a Construction Mortgage?
If you're planning on building a new custom home or renovating an existing one, you may need to consider taking out a construction mortgage. In Canada, it's also commonly referred to as a builder's mortgage or draw mortgage.
A construction mortgage is different from a regular mortgage in that it is paid out in installments, or draws, as the construction of the home progresses. These are known as progress advances.
You'll typically receive the funds gradually, with each payment being made as a specific stage of the construction process is completed. This ensures that the builder has the funds they need to complete the project, while also protecting you as the borrower.
It's important to note that construction mortgages are usually only available for new builds or major renovations. If you're simply looking to make minor repairs or upgrades to your existing home, a loan or line of credit may be a better option.
When you take out a construction mortgage, the lender will typically require you to provide detailed plans and specifications for the home or renovation project. They'll also want to know the estimated cost of the project and the timeline for completion. This information will be used to determine the amount of the mortgage they are willing to lend and the payment schedule.
The Stages of a Construction Mortgage
Pre-Approval
Before you start looking for a property to build your dream home, it's important to get pre-approved for a construction mortgage. This will give you an idea of how much you can afford to spend on your new home and what your monthly payments will be.
To get pre-approved, you will need to apply for a mortgage with a mortgage broker.
Approval
Once you have found a property, have a detailed plan and a fixed-price construction contract for your new home, you will need to apply for approval for a construction mortgage. The lender will review your application and assess the value of the property and the cost of construction. If approved, the lender will provide you with a commitment letter outlining the terms of the mortgage.
PRO TIP: It is important that the contractor you choose is aware of the terms of your construction mortgage. The contractor or home builder will only be paid as the draws are advanced and the subsequent draws will not be released until the work has reached the stages outlined in your mortgage commitment. Work with your builder and your mortgage broker to make sure your entire team is on the same page about the draw stages.
Draws
As construction progresses, the lender will release funds in stages, known as draws. These draws are typically paid out in increments as each stage of the construction is completed. To receive a draw, the lender requires proof that the work has been completed. Typically, your lawyer will call for a draw and the lender will send an inspector to the property in response. Once the lender has received confirmation from the inspector that the work has been completed, they will advance the next draw.
Completion
Once construction is complete, the lender will conduct a final inspection to ensure the work has been completed according to the plans and specifications. The lender will also want to know that you’ve received your occupancy certificate from the municipality. If everything checks out, the lender will release the final draw and the mortgage will be converted into a traditional mortgage.
Tips for Managing a Construction Mortgage
When it comes to managing a construction mortgage, there are a few things you need to keep in mind to ensure that everything goes smoothly. Here are some tips to help you manage your construction mortgage effectively.
Budgeting
One of the most important things you need to do when managing a construction mortgage is to budget carefully.
Make sure you have a clear idea of how much money you need for the construction project, including all the associated costs such as permits and fees. It's also a good idea to add a contingency fund to your budget to cover any unexpected costs that may arise.
Choosing the Right Contractor
Choosing the right contractor is crucial when it comes to managing a construction mortgage.
Do your research and choose a contractor who has a good reputation and a track record of completing projects on time and within budget. You should also ask for references and check them carefully to ensure that the contractor is reliable and trustworthy.
Working with the Right Mortgage Broker
Working with the right mortgage broker can make all the difference when it comes to managing a construction mortgage. Make sure you choose a broker who has experience working with construction mortgages and who can provide you with the guidance and support you need throughout the process.
A good mortgage broker can also help you find the best rates and terms for your mortgage, which can save you money in the long run. For advice from mortgage brokers who are experienced with construction mortgages, contact Spire Mortgage.
