Building or renovating your own home is such an exciting time and allows you to create something tailored to you and your family! But when it comes to construction mortgages, there are a few different types of loans: new construction and even pre-construction. Let’s break it down so you can determine the best choices for you.
Construction Mortgage
Construction mortgages service both new builds and large home renovations. The purpose of a construction mortgage is to advance you the full funds for your mortgage in stages as outlined below.
These stages align with the construction process of your home (or through major renovations if you are doing an upgrade) and inspectors are required at each stage to confirm the current construction and allow for advancement of the next set of funds.
- 1st Draw (Optional) 15% complete Excavation and foundation complete. You can also use this first draw to purchase land. 15% of Total Mortgage Advanced.
- 2nd Draw 40% complete Roof is on, the building is weather-protected (i.e. airtight, access secured) 25% of Total Mortgage Advanced.
- 3rd Draw 65% complete Plumbing and wiring is started, plaster/ drywall is complete, furnace installed, exterior wall cladding complete, etc. 25% of Total Mortgage Advanced.
- 4th Draw 85% complete Kitchen cupboards installed, bathroom completed, doors have been hung, etc. 20% of Total Mortgage Advanced.
- 5th Draw 100% complete Ready for occupancy with seasonal and exterior work completed 15% of Total Mortgage Advanced.
In addition to the difference in receiving funds from a construction mortgage versus a traditional mortgage, there are a few other key differences:
- Home construction loans are short-term agreements with generally one-year in length while mortgages have varying terms and range anywhere from 5 to 30 years in length.
- Most construction loans will not penalize you for early repayment of the balance, unlike traditional mortgages which can have pre-payment penalties if not part of your agreement.
- Monthly payments are interest-only until the end of construction.
- Construction loans only charge interest on the amount of the loan used during the construction. The borrower does not have to pay interest on any unused portions. Traditional mortgages require the borrower pays interest on the entire amount of the loan.
- Construction loans can provide upfront funds to purchase land for your build, while traditional mortgages typically do not service land-only purchases.
- Any remaining costs of construction can be paid down by acquiring a mortgage on the home once it’s completed.
Note: If you are choosing to do a self-build, you will need to prove that you have enough experience to properly handle the construction from start to finish.
Keep in mind that, similar to traditional mortgages, construction loans have varying rates and terms depending on the type of property you’re building, the amount of construction and length of the construction.
Pre-Construction Mortgage
Somewhat different from a construction mortgage is a “pre-construction” mortgage. These typically apply to condominiums, townhouses and other new builds. When it comes to pre-construction condo purchases, mortgage approval is required as this tells the developer that you have the ability to finalize on the unit later.
Typically, mortgage pre-approval is required within 30-90 days of purchase but you can get mortgages as early as 2-3 years from when the project is due to be completed. In these cases, you may not necessarily be able to get a rate guarantee due to the timeframe but it is worth asking for a commitment letter if you’re seeking a mortgage closer to the final build.
Similarly with traditional mortgages, your ability to get approval for a pre-construction mortgage is determined by your credit score, income-to-debt ratio and your employment history.
Closing happens once the building has been registered and when you receive the title to your unit. However, with a pre-construction mortgage, your payments will start with the builder occupancy fees from the time of occupancy to final closing, which can be a period of 3-6 months depending on the project.
If you are looking to purchase a new build or are interesting in building your own home or renovating your current one, please be sure to reach out to us to discuss your options to ensure you’re getting the best construction loan for your project.
