Construction draw mortgages are for customers purchasing Land or requiring equity take-out on land for immediate construction of a principal residence or recreational property for their own personal use.
- Land must be zoned for residential or vacation home use
- Owner-occupied principal residences (4 units or less)
- Single family cottage/leisure homes
- New construction must conform to the National Building Code
- New Home Warranty Program contract registration required
Maximum Loan to value
- Building mortgages have changed with the scheduled banks. The banks like to see 20% into your mortgage so a loan to value of 80% is what they will finance. They may still require CMHC back end securing the build.
- They like to see you own the land free and clear first. Then they will do construction draws to finance your build. If you need a 1st draw to be a land draw to get you up to the 1st phase the lender would entertain this.
- When you purchase a lot with a house on it the existing mortgage holder has to be notified that you are building a new house on the land and taking down the old one. The lender will ask that the mortgage be paid in full before you can take down the existing home. Before you notify them you should have your construction financing in place with a broker/lender.
- Most lenders require the Builder/contractor must be a member of an approved New Home Warranty Program (NHWP) other than a self-builder.
- The lenders like to see a contract between the builder and the client on fixed cost bases.
The advance stages
There can be 4 or 5 draws depending on what you are requesting. An optional advance equal to 75% of the vacant land lending value can be request to assist with the purchase of the building lot or as equity take out on already owned land to assist with building start-up costs. The lenders like to do a 4 draw vs 5 draw but it would depend if you own your lot and have your equity all tied up.
The typical Advance Schedule is as follows:
- Draw 1 - Foundation: 15%
- Draw 2 - Lock-up: 15%
- Draw 3 - Drywall: 30%
- Draw 4 - Completion: 40%
At each stage a specific percentage of the building funds are advanced based on a cost to complete basis and always supported by an inspection report from an approved appraiser. Funds are directed to the borrower's lawyer (insured loans only) who insures that the appropriate construction lien holdbacks are maintained, prior to releasing funds to the Borrower or builder.
During the course of construction, advances are based on the lesser of the market value of the work in place or the cost to complete.
Lien hold backs
There are several types of holdbacks, which may be applicable to newly constructed properties whether funds are advanced on completion or progress advances are made. The holdback requirements will vary from province to province. The solicitors acting on the behalf of the lender will insure that the appropriate construction lien holdbacks are maintained, prior to releasing funds and must comply with the lenders policy and provincial legislation as referred to.
The following type of holdbacks may be applicable to newly constructed properties:
- Lien holdbacks
- Cost to complete holdbacks
- Seasonal deficiencies holdbacks; and
- Satisfactory purchaser holdbacks (if any) as indicated on the Offer to Purchase agreement.
The definitions of each hold back is in the glossary
When you are looking for funds from a lender they would ask that you have a contract in place between a builder and yourself if you are acting as the general contractor. Lenders are not doing self-builds - private financing would have to be obtain and your cost will be increased because of the money that is at a higher rate plus fees. There are more lenders who will look at your build if you had a contract done up on fixed costs vs cost plus fees. Anyone who consider themselves qualified to build their own homes should have industry knowledge and be prepared upon request, to submit a resume substantiating construction knowledge, industry contacts and references. Additionally:
- Borrowers should have sufficient resources, cash or independent lines of credit available to ensure the applicant has the financial wherewithal to carry the construction to the first draw.
- Borrowers should have the ability to absorb cost overruns up to 15% of the budgeted construction costs of the home. This may be in form of cash reserves or ability to cover higher servicing should the mortgage need to be increased up to 15%.
You are looking at a term of 9 months to 1 year to complete the construction of the new home. At that time you would be charged Bank Prime + 1% or the 1 year closed mortgage rate. You will pay interest only on advanced funds which will be due monthly and debited automatically from your bank account. There is usually a set administration fee with the lender per advance which is deducted from each advance. ($150.00 to a total of $500.00). The appraisal cost will also be at the clients cost as well and this will vary in each place so get a quote.
There are private lenders who will look at your build on revenue properties without a pre- sold. When you doing construction mortgage for the purpose of flipping the property, the lenders (banks) will want to see them pre sold or they will not entertain your application.