How do Construction Loans work in Canada?
Construction Loans are very popular in Ontario. Simply put, construction loans help homeowners secure the funding needed to build a new home. Most Canadian families do not have the amount of cash needed to build a home from scratch on hand and therefore turn to Construction Loans. These loans are sought out by homeowners of all ages.
Qualifying for a Construction Loan is a lot different than applying for other types of home equity loans. The process is stricter and more rigorous. You need to provide a lot more personal and financial data upfront. Additionally, homeowners are also required to pay a significantly larger down payment, usually well over 20%. The reason for this is because Construction Loans carry bigger risks for lenders. The number of things that could go wrong when building a home from scratch far outweighs buying a newly finished construction. Constructing a new home also requires the builder to have more capital available to complete the building process. Therefore, mortgage lenders often lend money to build a home based on its value at the different stages of construction and not at the home's estimated future value.
When do you need a construction mortgage rather than a conventional mortgage?
Home builders who are purchasing land for the immediate construction of a primary residence, cottage or leisure home for their personal use require construction loans. Individuals who own their own land and need money to cover the immediate, upfront construction costs before the first advance is dispersed by the lender also require a construction mortgage.
What are the different types of construction mortgages?
There are three different types of Construction Mortgages available to finance your newly constructed home.
- Builder/Contractor: Where you hire a registered contractor to complete the build of your home.
- Self-Built Home: Where you act as your own contractor during the build process.
- Buying a Newly Constructed Home: Where you need to pay the builder when you take possession of the property and a contractor had built the home with his own money.
Construction Mortgage Financing Options
There are a different financing options available with all the three types of Construction Mortgages. These are dependent on the expected time of completion and conversion. When building your home through construction financing the options available are Process-Draw Mortgage, Completion Mortgage, or a combination of the two commonly known as a Combined Mortgage.
- Process Draw Mortgage: Under a process draw mortgage, there are advances at the different stages of construction. Usually there are three draws occasionally there are four. Thrifty-five percent is released when roofing is complete, 65% after plumbing and electrical have been completed, and 100% at the time of final occupancy. The construction has to pass inspection before you receive the next payment during each stage. Under this kind of mortgage, the interest is charged on the total amount advanced. After the home passes its final inspection, the final advance is released.
- Completion Mortgage: When you have built or purchased your home through a residential home builder you should opt for a Completion Mortgage. Under this kind of mortgage, you need the funds when the house is finished and you’re ready to move in. Compared to a Process-Draw mortgage, in a Completion construction loan you initially need only a small down payment to start with. Once, the home passes the final inspection you get the full payment.
- Combination: Sometimes you can start with a Process-Draw Mortgage, which is then converted to a Completion Mortgage later. When the home is finished the single advance loan that comes with it acts like a regular residential mortgage.
We would be happy to answer any additional questions you may have regarding Construction Loans and Mortgages. Contact us at 1-866-401-LEND today!