If you’re looking to buy a home, you may be more keen on having one built from the ground up. Whether you prefer new construction or are particular about the type of home you want, building a new home is certainly an option. And a builder’s mortgage can help you finance it.
Key Points
- A builders mortgage, also known as a construction mortgage, allows you to finance the purchase of a home that has not yet been built or finished.
- There are two types of builders mortgages: progress draw mortgages and completion mortgages.
- Eligibility requirements for a builders mortgage include a strong credit, a large down payment and healthy financial profile. You’ll also need proof that construction will be completed within a certain timeframe and that the builder is experienced.
What Is A Builders Mortgage In Canada?
A builders mortgage — also known as a ‘construction mortgage’ — is a type of loan that allows you to finance the purchase of a home that has not yet been built.
A construction mortgage can come in two forms: a “draw” mortgage and a “completion” mortgage.
- Progress Draw Mortgage. This involves draw phases, whereby a certain amount of the mortgage is released by the lender following the completion of different phases of the project.
- Completion Mortgage. This involves funds not being released to the builder until the construction is complete.
How Does A Builders Mortgage Work: Progress Draw Mortgage
With a draw mortgage, lenders release funds incrementally as each phase of construction is complete. While a construction mortgage is in the draw phase, the lenders may only require interest to be paid on the loan amount. Once construction is complete, you’ll need to pay both principal and interest.
During each of the phases of construction, the lender will send a home inspector to the property to review the building’s progress and make sure that everything is going according to schedule. After each visit, the inspector will submit a progress report to the lender, who will grant more funds accordingly.
Your lender may lay out a plan that details the required percentage of construction completion before funds are granted. For instance, they may require that 15% of the project is complete for the first draw, 25% for the second draw, and so forth.
Keep in mind that the these inspections are typically at your expense. So, consider budgeting for this added cost.
Progress Draw Mortgage Schedule
A sample of the various phases of a draw mortgage may look like this:
| Foundation draw | Funds during the initial phase are provided when the plot of land is purchased and construction of the home has begun. |
| Framing draw | Funds are released when the structure of the home is built and enclosed. |
| Lock-up draw | Funds are provided when installation of the exterior doors and windows is complete. |
| Drywall draw | Funds are given when the installation of the drywall is complete. |
| Completion draw | Funds are released when the house is finished or nearly completed (90% to 100%). The electricity and plumbing should work, all permits and contracts must be signed, and the home must be liveable. |
How Does A Builders Mortgage Work: Completion Mortgage
A completion mortgage provides funding once the new home construction is complete. Rather than releasing a portion of the funds after each phase is complete, the lender will provide a lump sum after the job is done. That means the builder won’t receive any funds until you take possession of the home.
Since your mortgage will only be finalized 30 days before you officially take possession of the house, some lenders will require that you put a down payment on the home. However, unlike the down payment on an existing home, your lender should allow you to pay it in installments.
Once the home is finished, the completion mortgage is used to pay off the remaining balance to the builder.
Eligibility Requirements For A Builders Mortgage
The construction mortgage process to finance the building of a new home is more complicated than a conventional mortgage on an existing home. It’s also more expensive because fewer lenders offer this type of mortgage.
When you apply for a construction mortgage, your lender will likely require more assurances before they lend you money, such as the following:
Strong Credit And Financial Profile
As is the case with a traditional mortgage, your lender will require that you have a high credit score and strong income before they consider your mortgage application.
Proof That Construction Will Be Completed Within A Certain Timeframe
Many uncertainties can come with financing a home that is not built. As such, lenders may want proof that construction will be done within a certain time.
Proof That The Builder Is Experienced
The lender will want to know that the contractor or developer you hire is certified and has a history of well-built housing projects. If you’re acting as the contractor, your lender may require proof that you are adequately qualified to take on a project of this magnitude. This is especially true for progress draw mortgages.
Large Down Payment
When building a home, you’ll have to offer a more sizable down payment than a traditional mortgage. Usually, the down payment amount for a construction mortgage is around 25% to 30%.
During the 30 days before you take possession of the home, you can make certain changes to your mortgage. For example, increasing it to finance whatever extra upgrades you desire during construction. However, before the completion mortgage is finalized, it’s important not to make any significant changes to your credit or financial situation, such as switching jobs or taking out another loan. Deviating from the lender’s guidelines could result in your mortgage being revoked.
Additional Things To Consider Before Taking Out A Builders Mortgage
Before you apply for a builders mortgage, keep the following factors in mind:
Lots Of Preparation May Be In Order
There’s a lot of preparation you should do before you apply with any lender,. You should be prepared with construction plans, blueprints, and a contract for the construction and related costs.
If you’re doing a self-build, you’ll need a quote for building materials and labour. For the lot you’re buying, you’ll need to get permission from the municipality to build there. You’ll also need a copy of the deed and proof of sale for the property.
Consider Future Resale Value
While you should design your home according to your tastes, you may eventually sell the house. It’s good to think about what other people might like to see in a house to make it an easier sell. If the house is very big and expensive, for instance, you’ll again limit the number of potential home buyers who could afford it.
Consider The Overall Cost
Perhaps the most important consideration is the money you put into it. Prepare yourself financially for any unexpected occurrences that may cause a halt in the construction. Plus any extra fees or repairs that could arise. Anything can go wrong, so it’s best to have a backup strategy, even if it means dipping into your savings. It’s recommended to set aside at least 15% of the home’s total cost in case anything happens that endangers the project.
Should You Build A Home Yourself Or Buy A New Home From A Builder?
The type of financing you obtain will be determined in part by whether you decide to build a new home yourself or whether you buy from a developer.
Building The Home From Scratch
The biggest benefit of building a new home from scratch is that you can customize your home based on your preferences. You can also choose the types of finishes you like, rather than risk the builder choosing lower-quality materials.
If you’re planning to build your new home from scratch, you’ll first have to purchase a vacant lot to build it on. You might even be purchasing a lot with an existing home, with plans to tear it down and build a new one.
Buying From A New Home Builder
Buying a home already under construction from a new home builder is an option for those who wish to buy a brand-new house, but don’t want to go through the motions of planning and construction themselves. This is common when a new neighbourhood or housing community is in the midst of being built.
Essentially, you’ll be able to have some say in how the house is going to look but will be doing a lot less of the grunt work. You’ll still have other responsibilities, such as picking the lot you want to purchase, choosing the layout and the finishes, and what additions to install, if any.
Final Thoughts
Building a house from the ground up may be risky for you and your lender. If you’re looking to build your dream house, don’t let the thought of unfinished projects deter you. With a construction mortgage, there’s little reason why you can’t successfully build your dream home from the ground up.
Builders Mortgage FAQs
Can I get a variable rate on a construction mortgage?
Who gets the funding from a construction mortgage, the homeowner or the builder?
How many draws can I get with a construction mortgage?
What happens to a construction mortgage after the home has been built?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
