What is a Construction Mortgage in Canada?
For some people, building their own home is a lifelong dream. For others, finding the perfect home to buy can become so frustrating, they just decide to build their own. In Canada, a construction mortgage refers to a loan that finances the entire build of a new home, or will be put towards a home that has already been designed by a builder but is not complete yet.
While it can help you get into your dream home, securing a construction mortgage can be difficult as the lender does not have a finished home to use as collateral. A construction mortgage typically requires more money and a lot more effort than a standard residential mortgage. For these reasons it is extremely important you get your mortgage with the right lender.
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Types of Construction Loans in BC
In BC, potential homeowners have two options when purchasing a home that has not yet been built. These options are a progress draw mortgage, and a completion mortgage.
Progress Draw Mortgage for Building a House in BC
If you’re designing a home from scratch and are having a builder bring your designs to life, you’ll need a progress draw mortgage. Unlike a regular mortgage, the funds are not given all at once. Instead they are given in 3-4 separate installments called draws. Each draw is provided to the builder, not to the borrower.
The standard draws are as follows:
- Lock Up Stage: construction is 35/40% done
- Drywall Stage: construction is 65/70% done
- Completion Stage: construction is nearing the very end
Before each installment is given to the builder, an inspector is required to come and confirm that the build is going according to plan. It is very important that construction sticks to the schedule and budget, because if the inspector doesn’t give the progress a passing grade, the next draw won’t be given.
This type of mortgage is secured by the land and its improvement value. If there is no existing mortgage on the land, you will be able to get the first draw fairly quickly. But if there is an existing mortgage, it will need to be paid down before the first draw will be given. With an existing mortgage on the land, the first draw will only come through when the house is 30-50% complete. That means you’d need to foot the bill for the first half of the house, which is extremely expensive.
Lenders in this scenario like to see the home built within one year of mortgage application, and will also need proof that you’ve hired a capable builder. Many lenders also offer construction to permanent financing programs, where you would be enrolled into a regular mortgage once the home is built.
Completion Mortgage for Building a House in BC
A completion mortgage applies when you are purchasing a home from a builder that is already under construction. You get a brand new house, with a say in how it looks, but you won’t have to arrange all the fine details and hire contractors to get the work done.
With this type of mortgage, the funds aren’t transferred until the home is completed (or you take possession.) The benefit of this, is that you have plenty of time to make changes to your mortgage. The downside is that if something bad happens (like losing your job) before the home is complete and the funds are transferred, the lender could pull the approval.
Like all mortgage loans, the lender will require evidence of income and employment, and a credit check to qualify you for the loan.
For construction mortgages there are some additional things the lender will need before approving your application:
- Evidence of land ownership
- Expected payment schedule
- Complete home construction plans
- New home warranty registration number
- Construction contract including costs
- Signed purchase agreement
- Construction plans
- Real estate specifications (MLS feature sheet)
- New home warranty registration number
Note that these are general guidelines, and every lender has their own specific requirements.
Land Mortgage Requirements in British Columbia
If you’re building a home from scratch and don’t already have the land, you’ll need to purchase some. Obtaining a loan for bare land can be very, very expensive because there is obviously no house for the lender to use as collateral.
Standard down payments for land range from 25-35% The more rural the area, or the longer you are deferring the build, the more down payment is required – sometimes up to 50% of the land’s value. Having existing services on the land (like water, power, phone etc.) will make it much more likely to receive financing from a lender.
Fortunately, if you’re purchasing a home from a builder, you won’t likely need to purchase the land yourself.
Completion & New Home Construction Loans Down Payment Requirements
For a completion mortgage, a down payment is required when you submit the offer to purchase the property. Usually, the down payment is paid in multiple installments.
A new home construction loan (draw mortgage) will require a down payment to cover the cost of the land (if required) plus enough money to reach the initial draw.
Get the Best Construction Loan Rates with a Mortgage Broker
As you’ve read above, securing financing to build a home can be extremely difficult. All lenders have different programs, requirements, and exceptions. The easiest, and most efficient way to get your construction mortgage approved, and get an excellent interest rate, is by working with a construction loan broker.
A mortgage broker has access to 40+ lenders. Many of which you aren’t able to access on the consumer level. A mortgage broker will review your application, and then compare products across all of their 40+ lenders on your behalf, presenting you with only the best options. Having a mortgage broker shop around saves you both time and money, because they can get you a better deal than you’d be able to get by just walking into your local bank branch. Plus, mortgage broker services are free! They get paid by the lender, but only once your mortgage is approved.