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Understanding construction mortgages in Canada

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Searching for a home that fits exactly what you like can take a lot of time. To potentially use less effort and resources in the search, some homeowners will opt to renovate their existing home or build a house from scratch. To build their dream home, homeowners need materials and funding through construction mortgages in Canada.

What are construction mortgages in Canada? 

A construction mortgage in Canada, also known as a construction loan, is a lump sum from a lender that helps you cover the cost of building a home. Construction loans in Canada can be used towards home renovations or new construction on land you already own.  

Some homeowners will choose to build their dream home rather than sell their house and look for a new piece of property. Mortgages for construction provide the funds that the borrowers will need, but they work differently from standard mortgages. 

How a construction mortgage in Canada works

Construction mortgages in Canada are loans that are given out at different stages of a construction project. Each time the lender provides money, it is called a draw, and there are usually four or five draws. 

  1. First draw: excavation and foundation on the land.
  2. Second draw: adding and finishing the roof. 
  3. Third draw: electricity, plumbing, and walls are complete. 
  4. Fourth draw: the interior, like flooring and windows, is finished. 
  5. Fifth draw: finishing touches and completion of construction.  

During construction, your main financial obligation is monthly payments towards the interest. Once the house is completely finished, you’ll also start repaying the principal.  

The difference between construction and conventional mortgages

Both conventional mortgages and construction mortgages in Canada can come from major financial institutions and intend to provide you with a comfortable home. However, they operate differently and have unique characteristics.

A table comparing a construction loan in Canada and a conventional mortgage in Canada

Types of construction mortgages available in Canada 

Standard construction mortgages in Canada are not the only forms of funding you can receive when you’d like to make significant changes to your home. If your intention is a major renovation project with some rebuilding involved, you can look into other ways to fund your venture.

Renovation loan

Some significant renovations require complete reconstruction, such as adding new rooms like a basement or tearing walls to change the inside structure. Most lenders offer financial support to make the changes to your home. Depending on the lender, they may look into your financial background and renovation plans before approving you. 

Mortgage refinance 

In conjunction with renovation loans, refinancing your mortgage is one way to access a loan without selling your home and benefiting from comparatively lower interest rates. Since mortgage refinancing is adding a balance to your existing mortgage, you will likely need a strong credit score or have a decent loan-to-value ratio  

Home equity loan

A home equity loan is one of the most common ways to access the value you have stored in your property. Many traditional and alternative lenders can help you access your home equity, and the funds can help you cover the cost of bringing your building plans to reality.  

Since home equity loans are flexible, they can be used to build a new property, like a vacation house, or to give your current home a complete makeover. They tend to have comparatively lower interest rates too.   

Where to get construction mortgages in Canada 

The two primary sources of construction mortgages in Canada are banks and alternative lenders. They have different lending criteria, and the amount they give can depend on the loan agreement.  

  • Traditional lenders—banks are the most common source of lending, and several offer the funding you’ll need to build a home. However, qualifying for a loan requires a strong credit standing, making it challenging for many Canadians to get approved for a loan. 
  • Alternative lenders—some lenders will allow you to borrow more than enough to start your renovation or building project despite your credit score. One example is Alpine Credits who gives you a loan based on your home equity.  

Home equity loans as construction mortgages in Canada

One of the most accessible forms of funding is from the value you have stored in your home. If you’ve been living in your home for a while, you probably completely own it or have built some equity in your property. 

Home equity loans from Alpine Credits stand out from other forms of construction loans in Canada because they have more flexible eligibility criteria. If you own at least 25% equity in your home, you could get approved for one and receive the funds in a few days.  

You can estimate how much equity you’ve built by subtracting your outstanding mortgage balance from the appraised value of your home.  

home equity calculation in Canada

Home equity loans can provide just as much funding as standard construction loans in Canada, with Alpine Credits funding as much as $2 million. Approval for this loan doesn’t depend on your ability to provide a down payment or the details of your construction plan. If you have a home with equity, you can get a construction loan in Canada to achieve your renovation or contruction goals 

What are construction loan interest rates? 

Another advantage home equity loans offer is that they have comparatively lower interest rates than standard construction loan rates in Canada. Home equity loans are secured by your property, allowing lenders to feel more confident that you can repay the loan. 

Construction mortgage rates in Canada are known to be the highest compared to those for a traditional mortgage or a commercial mortgage. With mortgage rates constantly fluctuating, construction mortgage rates in Canada are the same but will constantly be higher than the current mortgage rate.  

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How to get a home equity loan from Alpine Credits

One of the best ways to build your dream home is to get a home equity loan, and you can find one at Alpine Credits. You get to benefit from flexible and substantial funding while working towards your goals. The process to apply is simple.  

  1. Apply for a loan—you can finish an application for a home equity loan within a few minutes. You only need to provide some of your personal information rather than your credit score or your income. Applying also will not affect your credit score.
  2. Get approved—if you own at least 25% of your home, you’re eligible for a loan worth up to 75% of your home’s equity value. If you’ve paid for more of your home, you’ll be able to borrow more from your property. 
  3. Start your project—you may be able to receive the funding in your bank account within a few days of your application. Alpine Credits processes the applications quickly, allowing you to achieve your goals sooner rather than later.  

Contact a Financial Solutions Specialist to learn more about construction loans in Canada and how they can help you build your dream home. The call is free of obligation.

Frequently asked questions

Much like a conventional mortgage worth over $1 million, you’ll need to provide a down payment of at least 20%. Depending on your credit score and financial history, some lenders may require a larger down payment. However, with home equity financing, you don’t need a down payment.

One way to estimate how much you’ll need is to calculate based on square footage according to where you live. For example, building a house in the Vancouver area can cost between $145 to $1090 per square foot, while it costs between $105 to $800 in the Montreal area. Depending on the size of your project and where you live, you may pay $100,000 to $2 million.  

Rather than providing the entirety of the loan at the start of the agreement, the lender releases funds at different points during construction. This keeps the project on budget and on track.  

Loans for construction are for any expenses associated with building a house. It may include the hired labour, contractors, or materials. However, traditional construction loans in Canada do not include designers and other design costs.