What’s a Construction Mortgage in Canada?

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When looking for your dream home, you could spend weeks or months searching all over town for a property that suits you right, only to get disappointed and come up empty-handed. Perhaps the housing costs in your town are not affordable, or you are unhappy with how the homes look. In this case, a construction mortgage in Canada allows you to purchase an empty lot and build your home. This process is difficult but solves the problem of purchasing a home you don’t like.

Before you do anything, it’s important to know that a property construction mortgage in Canada requires more effort and money (on the part of the borrower) than a conventional mortgage on an existing property would. However, if you see the project through to completion, you will have your dream home as you envisioned it.

How does a construction mortgage in Canada work?

Also known as a self-build mortgage, a construction mortgage in Canada means you are securing credit financing to build a home instead of mortgaging a fully constructed home. Note that building a house from the ground up can be more costly after factoring in other construction costs, such as the total cost of the building materials and the contractors you are likely to hire.

If you are an experienced construction contractor, you can design your dream home and start the construction project. But the chances are that you will need a team to finish the house. That being said, there are different types of a construction mortgage in Canada you can choose from. These include;

Progress draw mortgage

With a progress draw mortgage, you (the borrower) will be granted funds from your lenders in installments throughout the phases of the construction process until the entire process is completed. During each stage, your lender will send a property inspector to your home to review each construction milestone and ensure that everything is going according to the construction plans.

After each review, the home inspector will create and submit a progress report to your lender. Your lender might withdraw the construction financing if the building progress isn’t up to par. Here is what you should expect from the various phases of progress drawn mortgage.

Phase 1: You will get the foundation draw once you purchase a plot of land and begin your home construction process. Note that the foundation draw is granted only if the land has no or little mortgage on it. In case you are mortgaging the land, you are likely to get your first draw when your house is 30% to 50% completed.

Phase 2: You will receive the lock-up draw once your house is about 30% to 50% complete. That means you have laid the foundation and installed windows and doors. If you are mortgaging the land, this is the first draw you will.

Phase 3: Once your home is 65% to 70% complete with the heating system installed and drywall ready to be painted, you will receive the drywall draw.

Phase 4: You will get the completion draw when your home is either finished or more than 90% complete. The plumbing system and electricity should be functional, the building permit and construction contract signed, and the house livable.

Remember, purchasing a vacant piece of land to build a home is a huge expense. So, it would be best if you considered this expense before you decide to acquire the progress draw mortgage. Also, you will have to pay a fee every time a home inspector comes to review your construction progress.

The completion mortgage

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This is another type of construction mortgage in Canada. If you secure a completion mortgage, it means you have bought your home through a new builder, and the house construction is finished or ready for you to move in. So, the builder should not expect to be compensated until you possess the completed home. Note that your completion mortgage will be finalized 30 days before officially possessing your home. That means some mortgage lenders may require a down payment on the house.

Unlike the down payment on already existing homes, your mortgage lender should allow you to pay the required down payment in installments (like monthly payments). Your home might take four months to be completed – and most lenders grant a completion mortgage requiring that the home is completed within 120 days. Once it’s completed, the completion mortgage should pay off the remaining balance to the construction company or home builder.

Before your completion mortgage is finalized, it’s important that you don’t make significant changes to your credit standing, such as getting another big loan, switching jobs, or doing anything that’s beyond your lender’s specifications. Remember, deviating from your lender’s guidelines could mean your mortgage will be revoked.

Final thoughts

There are different types of construction mortgage in Canada. Before you decide on the specific construction mortgage in Canada that suits your home acquisition preferences, it’s important to consult with a mortgage broker or experienced real estate agent to learn more and evaluate your options when it comes to getting a construction mortgage in Canada.

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