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Canada’s current housing market is red-hot and as a result, some buyers are having a hard time finding the property of their dreams. If you don’t want the hassle of dealing with overbidding, cash offers or searching high and low for your dream home only to have it snatched away, you may want to consider building your own home. If this sounds like an option you’d consider, you’ll want to learn more about a home builder’s mortgage and how it will differ from a conventional mortgage.
What Is A Home Builder’s Mortgage?
A home builder’s mortgage is what you will require if you choose to build your own home from the ground up instead of purchasing a prebuilt house using a conventional mortgage. It’s important to note that it will require a bit more money and effort on your part, but if you are prepared to see the project to completion, you’ll be the proud owner of your very own dream home designed exactly to your specifications.
How Does A Home Builder’s Mortgage Work?
A home builder’s mortgage allows you to borrow money in order to have your own home constructed for you, rather than buying an existing one from a seller. This option gives you the ability to build your own home from the ground up. You’ll be able to select a plot of land, design the house and eventually construct the home itself.
There are a few differences between home builder’s mortgages and conventional loans that you’ll want to understand upfront. The loan term itself and when you receive the money are the two main differences. Conventional mortgages are meant to have longer terms and lower interest rates to allow you to slowly pay off your loan over time. Home builder’s mortgages are the opposite and are designed to help alleviate the short-term financial stress when it comes to financing your new home build, with money being released through different phases of the construction.
The maximum amortization period for a home builder’s mortgage is 1 year and will bring with it the highest interest rates when compared to conventional mortgages, which allow a maximum amortization period of 25 years with much lower interest rates.
Different Types Of New Build Mortgages
In Canada, there are two different types of new build mortgages you can choose from in order to finance the building of your home. You’re able to select either one or use a combination of both, depending on your lender’s policies and what province/territory you live in.
Progress Draw Mortgage
A progress draw mortgage is when the lender gives the buyer the funds in installments throughout the different stages of the build until the project is either fully completed or nearing completion. During each of these phases the lender sends a home inspector to the property to check in on progress and make sure schedules and timelines are being met. This inspector will be required to submit a report to the lender after each inspection is complete so the lender can grant more funds for the next phase as the project moves forward. If the inspector determines the construction isn’t up to par, the lender may be forced to withdraw the funding.
Construction Draw Schedule
The construction draw schedule is typically broken into four phases as outlined below:
“The Foundation Draw” is first received once you’ve found/purchased your desired plot of land and construction of the home has officially begun. This draw will only be granted when the land has little to no mortgage on it, so if you’re still mortgaging the land, you’ll only receive this first draw when roughly 30% – 50% of the house is completed. This means you’ll have to cover the costs associated with completing that first portion of the home build project.
“The Lock-Up Draw” is received when the home is about 30% – 50% complete overall. This typically means that the foundation has been laid and the windows and doors are installed so that you can literally “lock up” the house. As mentioned above, if you’re still mortgaging the land you plan to build on, this will be the first draw you’ll receive.
“The Drywall Draw” is received when the home is about 65% – 70% complete, with the heating system installed and the drywall is ready to be painted.
“The Completion Draw” is received when the house is either completely finished or very near to completion (roughly 90% – 100%). At this point, the electricity and plumbing should be working, all permits and contracts must be signed and the home is now officially livable.
A completion mortgage is secured when you’ve purchased your home through a new home builder and the construction is already completed, or at least at a point where you can move in. In cases like this, the builder isn’t expected to be compensated for the sale until you officially take possession of the home. This means your mortgage isn’t finalized until 30 days before you take possession. As a result, some lenders may require a down payment but if that’s the case, they should allow you to pay in installments, unlike what you would encounter with a traditional mortgage.
Home Completion Schedule
Most lenders who grant completion mortgages need the home to be completed within 120 days, so once the home is finished, the completion mortgage itself should pay off the remaining balance to the builder.
Since completion mortgages aren’t finalized until 30 days before you take possession, you’re entitled to make certain changes to the mortgage, like increasing it to finance specific build upgrades. As with any mortgage, it’s still very important not to make any significant life changes (new job, car loan, etc.) before the completion mortgage is finalized, as you could wind up deviating from the lender’s guidelines and having your mortgage revoked as a result.
The Construction Mortgage Process
As we mentioned above, the process to obtain a construction mortgage is more complicated and expensive than a conventional mortgage. Not only is the project a big undertaking, but lenders will also require more assurances throughout the process before they start dishing out funding. Unlike a conventional mortgage, a good credit score and decent income often isn’t enough to secure the loan. Since there are so many unknowns with financing a nonexistent structure, lenders will require you to provide proof that the construction of your home will take place within a certain timeframe. If you’re borrowing from a bank, they’ll also likely want to verify that the crew you’re using (builder, contractor, etc.) are certified and have a history of well-built housing projects.
Be warned that if you’re planning to act as the contractor yourself, it’ll likely make your lender a bit skeptical until you’re able to provide proof that you’re qualified to take on a project of this size. This is all especially true for progress draw mortgages, because the house isn’t built yet, so the lender is taking on a much bigger risk. If anything goes wrong during construction, they could potentially lose a lot of money. If you default on your loan, they might have to repossess the property and then try to sell a plot of land with a partially finished house on it, which isn’t exactly easy to do.
Construction Mortgage Eligibility Requirements
Since the collateral for a construction mortgage is an unfinished home, the lender is taking a much bigger risk lending you the funds to complete the project. As a result, should you choose to pursue a construction mortgage, you’ll need to have a more sizeable down payment than you would with a conventional mortgage, think 25% – 30%. Similar to a conventional mortgage, your lender will also look at your income, debt load and credit score, but just know that the eligibility requirements are stricter for construction mortgages due to the sheer size of the project, the many unknown variables and the level of risk for the lender.
Construction Mortgage Financing Programs
There are a number of programs available across Canada that help make it easier to secure financing for construction mortgages. It’s advised that you look into which options are available in your specific province/territory so you know what resources you have at your disposal before choosing this financing option.
Home Improvement Mortgages
Some lenders may offer what’s called a home improvement mortgage, which provides you with an additional amount of financing, on top of the home’s purchase price, to pay for minor improvements. You’ll only receive additional funding once the home improvements have been made, so you’ll have to front the cost at the start and can expect to be reimbursed later. It’s important to note that some home improvements will increase the property value and if that’s the case, the mortgage down payment required will also increase.
CMHC Rental Construction Financing
If your build involves constructing multi-unit rental housing, there’s a chance you may qualify for funding through the Canadian Mortgage and Housing Corporation. This can provide funding for up to 100% of your construction costs or 85% of the property’s lending value (whichever is less) with a minimum of $1,000,000. This financing includes CMHC loan insurance at no cost and requires no premiums. The financing is on a 10-year term with a fixed interest rate with a maximum amortization period of 50 years. You will be charged an application fee of $200 per residential unit, or 0.3% of the loan amount over $100,000 if it’s considered nonresidential.
CMHC National Housing Co-Investment Fund
This fund exists to finance energy-efficient, accessible and socially inclusive housing across Canada. This housing can be for mixed-use, mixed-tenure, mixed-income affordable housing purposes and the builder can receive up to a 95% loan-to-cost through low-interest and forgivable loans accompanied by a 10-year fixed interest rate and up to a 50-year amortization period. If your project is limited in terms of cash flow, you are still eligible for funding but won’t be prioritized.
Quebec Downtown Housing Grant Program
This program is designed to provide developers in Quebec with up to a 90% subsidy on property taxes for construction projects located within the downtown area. The funding and duration you qualify for will depend on the size of your building. You can learn more about the financing program and required qualifications by clicking here.
If you’re thinking about building a new home, we can help! Get in touch with our team to learn more about your mortgage options and see which may be the best fit for your personal needs.