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The most well-known way to finance a build is through a construction mortgage. Now, construction mortgages are broken down into two types. The draw mortgage, which is generally used if you are building a home from scratch by yourself or with a builder, and the completion mortgage, which is used when you are buying a home from a builder which is almost done or about 2 months away from completion.
The big banks are quite similar in their approach to a construction mortgage where they require a 20-25% down payment on the cost of the home, and proof that you own the land. The money is advanced in draws during construction, with a schedule that shows you how far the home has to be built in order to access the money. In order to release a draw, most banks send out an appraiser to make sure that the work has been done as required.
In Canada, you can simply look up the Appraisal Institute of Canada draw guidelines to get a better idea of what the percentage of completion on your home looks like.
I have found that most banks want to stick to about 4 draws, one at 16%, 35% 65% and 100%.
You’ll get many different variations of this from different lenders but know that it’ usually 3-4 draws. If you like, put your email into the comments, and I will send you a sample of a draw schedule that breaks down how a financial institution releases money.
Once the construction is complete, the construction mortgage changes over to a normal mortgage, or ends when you get a new one and pay the existing construction mortgage off.
A very important point to consider is that conventional lenders will NOT combine your draw mortgage with the purchase of vacant land. You’ll have to buy the land separately or get a completely separate loan in order to purchase the land. And be warned, you will probably need a larger down payment than for a house, at around 30-35% of the cost of the land. Most banks don’t like bare land, and some won’t even finance them. You can buy the land outright, use lines of credit, or a HELOC (also known as a home equity line of credit) or, and here’s a pro-investor tip, negotiate with the seller of the land to pay them after you have built and then refinanced the new home on their land. Tricky, but it can be done.
Now, a completion mortgage, on the other hand, is the second type of construction mortgage and is used when you are buying a complete or almost complete house built by a home builder. This is really just like setting up a normal mortgage, however, it may have different terms if the home has not completed construction.
Ok. Now let’s move on to financing a build if you are you are wanting to be your OWN GC or build your own house.
Now, I’ve been getting lots of feedback about people wanting to build their own home without a builder, and that’s awesome and completely doable, but there are some things that you need to be aware of when financing a self build. Most banks require that you build with the licensed builder which is registered with a new home warranty program or a certified general contractor that also carries similar insurance.
If you are acting as your own general contractor, you’ll have to pay much higher premiums or down payments as the banks see this as more of a risk that the home will not be built properly, or have major deficiencies that they would have to deal with should they have to foreclose
Credit unions are generally smaller and are willing to look at smaller deals and base their decisions on the person, and not just the numbers presented.
