Why buy a home when you can build one yourself? Building a home is a dream for a lot of Canadian families. Building your own home offers many benefits – not only can you select the perfect location, you can fully customize the look and feel of your new home right down the backsplash.

Unless you’re able to purchase the lot and pay for the construction costs in cash, you’ll need to obtain a construction mortgage. A construction mortgage is a lot different than a residential mortgage. Budgeting is crucial, as you’ll require a lot more money upfront to make your dream home a reality.

The Basics of Construction Mortgages

Just like a residential mortgage, you’ll need to apply for a construction mortgage with your lender. Once you’ve chosen a mortgage product that suits your needs, your mortgage lender will appraise your lot and building plans. When your lender has approved your mortgage, you can begin construction.

Similar to residential mortgages, rate holds are offered on construction mortgages. Your rate hold is typically guaranteed 90 days from the date of your mortgage approval.

Understanding the Draw System

As mentioned, you’ll require a lot more of your own money up front to fund the construction of your new home. Unlike residential mortgages, you aren’t given the full mortgage amount at once; instead you’re given the funds in parts based on milestones or “draws,” as lenders call it. Funds are usually distributed in at least three draws. The reason is simple – mortgage lenders don’t want to lend you a large sum of money for a home that isn’t even built yet. If you were to default on your payments, it would be very difficult for your lender to foreclose and recover the full amount owning.

If you need a construction mortgage to help purchase the land for your new home, most lenders will require a down payment of at least 20 per cent. Your first draw can be for a maximum of 65 per cent of the appraised value of your land. For example, if you’re purchasing a lot for $100,000, your first draw could be for $65,000; you’ll need to come up with the difference, $35,000, yourself. If you already own your own land you can skip this stage.

The Stages of Construction Mortgages

Stage one takes place once your land is purchase and you’re ready to starting building your new home. Your stage one draw needs to take place within 90 days to maintain your rate hold. It’s vital to have some savings put aside for the first stage, as your lender won’t allow you to take your first draw until the after the work has been completed and appraised. Stage one is when a lot of the work should take place with the foundation and backfill complete, house shelled up, and the windows and doors installed.

After stage one, you’ll have easier access to your funds going forward. As you can imagine, you’ll need funds throughout the construction of your home. When you need to access to your funds, you’ll need to advise your lender, who will send an appraiser to your property. Once the appraiser is satisfied with the work that has been done, the funds are forwarded to your real estate lawyer, who will release the funds between 30 and 60 days after the work has been completed. Depending on your province, your lawyer will hold back between 7.5 per cent and 20 per cent of the draw to ensure there are enough funds to pay your contractors and there isn’t a lien filed against your property.

Your final draw must take place within 12 months of your initial mortgage approval to maintain your rate hold. To receive your full mortgage amount, the final appraisal must confirm 100 per cent of the work has been completed and your home is ready for occupancy. Once approved, your regular mortgage payments will begin (although you’ll owe interest from the day you took your first draw).

Construction Mortgage Alternatives

If you don’t want to deal with the draw system or you don’t qualify for a construction mortgage with a primary lender (for example, you’re carrying another property), you can apply at private lenders. You’ll avoid a lot of the headaches of the draw system and have more freedom, but it will cost you – a typically one year term today is 8 per cent to 12 per cent, plus fees, says Sean Schumacher, Mortgage Agent at Safebridge Financial Group.

Do you plant to build your own home one day? Do you have any experiences with construction mortgages?

About the AuthorSean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.
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