For some in Ottawa and the rest of Ontario, just buying a home may not be enough. Building a dream home is their main goal. Having a say in the construction of your dream home can be very exciting but on the mortgage side, it can be quite overwhelming and complicated especially those who are building a home and are getting a construction mortgage for the first time.
Construction financing can be difficult and with that it is important to learn as much upfront on how construction mortgages work.
How Does a Construction Mortgage Work?
Construction Mortgage Basics
A construction mortgage is the a of financing that assists with those who are looking to build a home. It is different from a regular mortgage that is used for buying a pre-existing property. A construction mortgage covers the different expenses that are part of the building process.
The structure of a construction mortgage is very different than a typical mortgage. With construction financing, the total amount of funds you require are not given to you all at once. They are distributed in draws at various stages of the build. A basic draw schedule may be at 30, 60 and 100% complete. However a custom built home may require more draws.
With construction mortgages you need to have on hand the funds required to get you started. There are many upfront costs that come with building a home such as financing all or a portion of the lot, preparing the lot, building permits, plans and so on. Lenders are not able to lend many of the upfront costs so it is important to have a savings available when building a house.
Learn more: Construction financing FAQ
How do Construction Mortgage Draws Work?
After you are approved for construction mortgage, the mortgage lender will advance the funds to you in stages. The lender typically will advance funds based on the percentage that the property is complete. For example if the property is 20% complete, then they could look to advance you 20% of the funds total funds.
If any funds are needed between advances, this will be your responsibility. However, once the funds are advance from the lender you can pay yourself back.
At each draw stage, an inspector will go by the property, at a cost to you, and find out how much the build has progressed. From there the inspector’s report goes to your lawyer who can advance a portion of the construction mortgage.
Your builder or contractor will detail the total amount of funds needed to build the home. This amount is then divided into different parts based on the different timelines and stages of the build. For example the amount needed for foundation and framing.
The lender will be involved during the entire build process. They will want to know at which stage the build is at and that it is on schedule.
Contact Me to Start a Construction Mortgage Application
The Stages of Building a House
There are generally five main stages when it comes to building a house.
Stage one: Base
The first stage is building the base of the home. This takes into account foundation, leveling the ground, having a plumbing installed and the waterproofing of the foundation. This usually is looked at as 10% of the overall build. This process can take up to two weeks time.
Stage two: Frame
This stage will entail building the frame for your home. This includes building the trusses, the roof and the windows for the home. This stage is about 15% of the overall build. The stage can take into account brickwork that may be needed as well.
Stage three: Lock up, weathertight or wind tight
This is one of the larger stages of the build. This is for where property is closed up or can be locked up. This stage is also known as weathertight or win tight as the roof is on and the doors and windows have been installed. This can also include insulation of the house. This process can take a approximately a month.
Stage four: Fixing, fit-out or fitting and fixtures
The stage involves all the fittings and fixtures to finish the house. This includes kitchen cabinets, bathroom cabinets, doors, flooring, tiling, shelves and so on. All the plumbing and electrical will be finished at this stage as well. This is about 20% of the overall build and due to it being more detailed, he can take approximately six weeks to finish the stage.
Stage five: Completion
This is the final stage and takes care of the different details needed to finish the home. This includes cleaning and clearing the floors, painting, fence installation and overall cleaning of the home and or site. This is usually the last 15% of the bill.
How do Construction Lenders Charge Interest on a Construction Mortgage?
When you get a construction mortgage, typically the payment will be interest only for the duration of the build. Also, depending on the lender, interest will be paid on the portion of funds that has been drawn already. For example, if you were approved for a $400,000 construction mortgage but have only used $200,000, you will be charged interest on only the $200,000 that is currently being used.
Some lenders are able to work the construction mortgage payments into the overall mortgage amount so that you do not have any out-of-pocket cost during the construction. Once the construction is complete, typically a new mortgage is needed to pay off the construction mortgage. This mortgage is sometimes referred to as a take-out mortgage.
This mortgage, can be with a traditional bank such as TD Canada Trust, Scotiabank, RBC and more. The mortgage can also be with a credit union or monoline lender. Your Ottawa mortgage broker will have access to construction lenders and traditional banks so they should be able to assist with the entire process. Mortgage brokers in Ottawa also have access to lot financing.
Learn more: Monoline lenders
If you are looking to sell the property once it’s built, you could do so at this time or convert the mortgage into an open mortgage. This way there are no penalties to pay off the mortgage once the home sells.
What Documents Do I Need For a Construction Mortgage?
In addition to the standard documents needed to apply for a mortgage, there are specific documents needed for construction mortgage.
The documents typically needed for construction mortgage are:
- The builder contract or purchase agreement: This document lays out the overall cost of the build, the timeframe for the work, the draw schedule is required and so on.
- Plans: The building plans or blueprints are important as this will have the layout of the house as well as the size. Also the different specifications of the build are required including the materials and finishes that you are using for the home.
- Building permits: The lender would like to see that you have all the required permits from the city or municipality for the build.
- Assets confirmation: Some lenders will like to see that you have a certain amount of liquid assets on hand to assist in between draws or to get you to the first draw. Also, that you have enough funds available to get you through the start up costs, for example, the building permit, cleaning the lot, demolishing the current property and so on.
Learn more: City of Ottawa Building Permits and Renovating website