Construction mortgages in Ontario
Many Ontarians on the lookout for the perfect home to settle down in are facing challenges. Whether it’s the property size, the structure, or the location, finding a home that meets all their criteria is much harder than it seems. Many Canadians decide to build their dream home from scratch instead of finding a pre-built home in these cases. However, you might be surprised to learn that aspiring home-builders can also qualify for construction mortgages in Ontario. Construction mortgages are specifically intended to finance the construction of a house from scratch, from its foundation to its finishing touches. We have collected some information about how construction mortgages in Ontario work and things to consider before choosing this financing solution.
How does a construction mortgage in Ontario work?
A construction mortgage, also known as a builder mortgage, is a loan provided by a lender that allows the borrower to receive financing to build a new home. The borrower of a construction loan in Ontario can go through a builder or build the house themselves, but there’s a slight variance in terms of the agreement. The critical difference between a construction mortgage and a regular mortgage is that construction mortgages are released on a staged basis, with each stage of the loan being given out as a “draw.” You don’t receive your financed amount all at once; instead, you get the total in increments over time as you continue to build your home. In Ontario, a construction mortgage also varies depending upon whether you already own the land. If you own the land already, you can opt for a first advance, which will allow you to begin preliminary construction work faster. If you don’t already own the land, some lenders will allow you to use a first advance towards buying a vacant lot where you can start construction.
Owning the land is highly recommended before you choose a construction mortgage, as it proves more cost-effective in the long run. However, if your financial situation still requires you to mortgage your land, and if you’re starting construction, note that you may only receive your first advance when the home is 33% to 50% built. As a result, you may need to apply for a separate mortgage for the land. Thankfully, many lenders allow you to use your first advance towards purchasing your land. This means that if your first advance helps you fully pay off your loan for the land, you can opt to sign a construction mortgage agreement and start building right away with the funds you have on hand!
How does a construction mortgage schedule work?
A construction mortgage in Ontario depends on how much progress has been made towards building the home. It is usually measured as a percentage. The lender releases funds to the borrower in stages based on the progress. Here is a breakdown of how the stages of a construction mortgage in Ontario work:
First Draw: This stage requires that the land be excavated and the house’s foundation set in place. This accounts for around 15% of construction work. You will need to provide the funds for these steps yourself. Once these steps are complete, you will receive approximately 15% of your mortgage amount. This step is optional and can be consolidated into the second draw if you choose.
Second Draw: You can receive the funds for this stage once you have completed putting in the roof and have built enough to make the building watertight and secure against the weather. Usually, this is considered 40% complete, and you receive another 25% of your construction mortgage funds for this step.
Third Draw: At the third stage of the construction mortgage in Ontario, builders need to have begun the electrical wiring and plumbing installation, with the furnace, plaster, and drywall all in place. This marks approximately 65% built completion, and you receive another 25% of a standard construction loan in Ontario.
Fourth Draw: The installation of fixtures and cabinets for areas like the bathrooms, kitchen, and bedrooms should be finished by this stage. Your home should already look nearing completion, with around 85% of the work completed. Once you reach this stage, you can get about 20% of your construction mortgage in Ontario.
Fifth Draw: By now, your home should be fully built with all interior and exterior work finished, including yard and driveway installation. This marks the final draw stage and will get you the remaining 15% of your construction mortgage amount for the total payout of a construction loan in Ontario.
Consideration for getting a construction mortgage in Ontario
The construction mortgage process is balanced and easy to understand, but there are a few factors that you should be aware of before you choose this financial solution. Your lender may request you to hire an inspector to visit your construction site to ensure you’re keeping up with the draw schedule before releasing the funds for each stage. The borrower pays the inspection costs. This is an additional expense that you should account for within your budget. Construction mortgages are offered in Ontario, but this might not be the case in all provinces and territories. Therefore, you should check if your mortgage lender provides construction loans before buying any land.
Once you sign your mortgage agreement, you cannot change the total amount of a construction loan in Ontario. Therefore, if any upgrades or changes to your home are needed after you’ve signed the agreement, you will need to adjust your budget or pay the additional costs yourself.
A construction mortgage in Ontario is a great way to finance your dream of having a custom-built home. While several lenders can offer this type of financing, it’s essential to understand how a construction mortgage in Ontario works and the associated conditions before you sign an agreement.