CONSTRUCTION MORTGAGES &
CONSTRUCTION FINANCING
Construction financing can help fund the building of a new home, a major renovation or addition, or an eligible development project.
Unlike a traditional mortgage that is generally advanced at closing, construction financing is commonly released in stages as the project progresses. The financing structure, required equity, draw schedule and qualification requirements vary by lender, property and construction plan.
HOW DOES A CONSTRUCTION MORTGAGE WORK?
A construction mortgage provides financing in stages rather than advancing the entire mortgage amount at once. Funds are released as construction reaches specified milestones and the lender confirms that the required work has been completed.
PROGRESS DRAWS
Construction funds are generally advanced through a series of progress draws based on the completion of agreed construction stages.
Depending on the lender and project, stages may include:
✓ Foundation
✓ Framing
✓ Lock-Up Stage
✓ Interior & Mechanical Completion
✓ Final Completion
The exact number and timing of draws vary by lender and construction program.
CMHC also recognizes progress advances for eligible new-construction financing and certain major improvement projects.
PROGRESS INSPECTIONS
Before a construction draw is released, the lender may require an inspection or progress report to confirm the stage of completion and the value of work completed.
Appraisals, inspections and other construction documentation may be required throughout the project.
WHAT DO LENDERS REVIEW?
Construction financing requires a detailed review of both the borrower and the proposed project.
✓ Construction Plans & Specifications
✓ Detailed Construction Budget
✓ Building Permits, where required
✓ Builder or General Contractor Agreement
✓ Construction Timeline
✓ Land Ownership & Property Value
✓ Estimated Value Upon Completion
✓ Available Equity
✓ Borrower Qualification
✓ Construction Experience, where applicable
✓ Contingency Funds or Reserves, where required
For development and commercial construction projects, lenders may also review project feasibility, borrower equity, financial strength, pre-sales or pre-leasing where applicable, and the borrower’s track record completing similar projects.
INTEREST DURING CONSTRUCTION
Interest is generally charged on the amount of financing that has actually been advanced, rather than on the full approved construction mortgage from the beginning.
Payment requirements during construction vary by lender and mortgage structure. Some financing arrangements may require interest payments during construction, while others may structure construction-period interest differently.
BUILDING ON LAND YOU ALREADY OWN
If you already own the land, its value and any existing financing on the property may be considered when the lender determines the overall construction financing structure and required borrower equity.
The treatment of land equity varies by lender and program. A current appraisal, construction budget, plans and evidence of available funds may be required.
NEED TO PURCHASE LAND FIRST?
Financing the purchase of vacant land and financing the subsequent construction are not always the same transaction.
Available options depend on the lender, property, proposed construction, borrower equity and overall financing plan. Some construction programs require the borrower to already hold title to the land before construction advances begin.
For example, under CMHC-insured new-construction financing, loan advances on vacant land are not permitted, and an owner-builder or contract-built borrower must hold title to the land by the first construction advance.
OWNER-BUILT & CONTRACT-BUILT HOMES
OWNER-BUILT HOME
In an owner-built project, the homeowner owns the land and either performs or directly manages the construction of the home.
Additional documentation, experience, inspections and lender oversight may be required depending on the financing program.
CONTRACT-BUILT HOME
In a contract-built project, the homeowner owns the land and contracts with a builder to construct the home according to agreed plans, specifications, budget and timelines.
CMHC recognizes both owner-built and contract-built arrangements for eligible insured new-construction financing.
MAJOR RENOVATIONS & ADDITIONS
Construction financing may also be available for significant renovations, additions or improvements to an existing property.
Depending on the size of the project, funds may be advanced in stages as work is completed. Under current CMHC homeownership programs, improvements greater than 10% of the as-improved property value may use progress advances rather than a single advance.
✓ Major Home Renovations
✓ Structural Additions
✓ Extensive Interior Remodeling
✓ Property Expansion
✓ Eligible Improvement Projects
COMPLETION & LONG-TERM MORTGAGE FINANCING
Once construction is complete and all lender requirements have been satisfied, the construction financing may transition into longer-term mortgage financing or be repaid with a separate mortgage, depending on how the original financing was structured.
Final requirements may include an inspection, appraisal, occupancy permit, completion documentation and confirmation that construction complies with applicable requirements.
For CMHC-insured new homes, recognized new-home warranty coverage is generally required where an approved warranty program is available.
WHY WORK WITH A MORTGAGE BROKER FOR CONSTRUCTION FINANCING?
Construction financing involves more moving parts than a standard mortgage, including budgets, draw schedules, inspections, appraisals and project-specific lender requirements.
✓ Review Available Construction Financing Options
✓ Compare Draw Structures & Financing Terms
✓ Identify Required Documentation Early
✓ Coordinate Financing With the Construction Timeline
✓ Review Land & Construction Financing Requirements
✓ Help Prepare the Application for Lender Review
START PLANNING YOUR CONSTRUCTION FINANCING
Every construction project is different. The appropriate financing structure depends on the land, project cost, available equity, borrower qualification, construction arrangement and expected completed value.
Rihana Peiman can help clients in British Columbia review construction mortgage options and understand the financing requirements for building, renovating or expanding a property.