08 Mar Mortgages For Under Construction Homes
Thinking of building your own home? Interested in buying a run-down property for its prime location, tearing it down and rebuilding?
Many Canadians would love to help design their own home if they had the chance. Some are even brave enough to take on a tear-down and start from scratch.
But for those of us that aren’t professional builders or contractors, there’s one major obstacle to making this dream come true: the financing. How can we make sure we have access to enough money to complete the work?
When it comes to new construction, homeowners have two main options: completion mortgages and draw mortgages. Today, let’s take a look at both options and see which one is best for your under construction home.
Completion mortgages are the most popular option for new construction. If a buyer has a home built through a residential home builder – the ones with sale centres and show homes, who sometimes build entire neighbourhoods at a time – they will usually need a completion mortgage.
With this type of mortgage, the builder only requires payment once the house is completely finished, thus the term “completion”. The actual mortgage is only needed on closing day. These builders often require some sort of deposit, but it’s often small, and it is taken off the final balance upon closing.
With so much new home construction going up in Canada’s largest cities, lenders deal with completion mortgages all the time. They generally aren’t any harder to get than a traditional mortgage. The timeline is a little different, since it often takes about a year for the house or condo to be built. Otherwise, the same mortgage rules apply. For more information, I explained some of the most recent mortgage rule changes in this recent blog post: The Impact of Ottawa’s New Mortgage Rules.
Draw mortgages are a little more complex. They are often needed when a client already has their own land. In this situation, the clients choose to work with a private construction crew, or even do the work themselves.
A draw mortgage is paid out in several lump sums. Most lenders typically pay it out in three stages. The first payment is made when the home is about 35 per cent complete, which usually means foundation, framing and roof. The second is given around 65 per cent finished, or once plumbing, electrical and drywall is done. The final amount is accorded once construction is complete and the owners take possession. Each lender has their own schedule, so ask your mortgage professional for your specific details.
With a draw mortgage, interest rates tend to be a bit higher than traditional mortgages. Also, before each draw (or lump sum), clients usually have to provide their lender with professional inspection reports. A final inspection must be passed and all legal papers must be signed before the final balance is paid out.
Building a house is a lot of work. Getting the right financing shouldn’t be. A mortgage professional can make the process much easier, so don’t hesitate to contact us if you have any questions!