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Building a home is complex, but your mortgage shouldn’t be.
Before deciding on a brand new home, let The Mortgage Professionals help you understand the complexities, special terms, warnings, and things to watch out for in construction mortgages, which are also known as self-build mortgages. Construction mortgage financing typically falls into 3 categories:
1. Self-Build Home Mortgage Financing
A self-build home mortgage financing option is a type of mortgage that is specifically designed for people who are planning to build their own homes. In Canada, self-build home mortgage financing is typically provided by banks, credit unions, and other financial institutions. The process of obtaining a self-build home mortgage financing option in Canada generally involves the following steps:
- Pre-approval: Before you begin the building process, it is a good idea to get pre-approved for a mortgage. This will give you an idea of how much you can borrow and what your monthly payments will be.
- Construction financing: During the construction phase, you will need to secure financing to pay for the materials and labour needed to build your home. This can be done through a construction mortgage, which is a short-term draw loan of usually one year Interest only mortgage that is used specifically for this purpose.
- Conventional financing: Once the construction of your home is complete, you will need to convert the construction mortgage to conventional mortgage financing. These are usually 1-5 year terms with a fixed or variable rate to cover the remaining balance of your mortgage. This can be done through a traditional mortgage or other types of financing.
When applying for a self-build home mortgage financing option in Canada, lenders will consider factors such as your credit score, income, debt-to-income ratio, land value, building plans, cost to complete budget for materials and labour and value when complete.
To summarize, a Self-Build Home is when you build your own home as the head contractor and you hire subcontractors to complete the work together. You have two mortgage options: (1) Progress Draw Mortgage and (2) Completion Mortgage, both of which are explained below in detail. Schedule a call with us and we’ll help explain these options.
2. Self-Build: Builder/Contractor (Turn Key) Mortgage Financing
Self-Build: Builder/Contractor is sometimes referred to as Turn Key Mortgage Financing. This is when you enter into an agreement with a contractor to build your home. Typically the builder will request Financing Draws. Your mortgage options are (1) Progress Draw Mortgage and (2) Completion Mortgage.
A progress draw mortgage and a completion mortgage are both types of financing that are used to fund the construction of a new home or other property. However, there are some key differences between these two types of mortgages:
Progress draw mortgage:
A progress draw mortgage is a type of mortgage that allows the borrower to access funds from the lender as needed during the construction process. The borrower can request "draws" from the lender at various stages of the construction process, and the lender will release the funds to the borrower to pay for materials and labour. The borrower is typically required to make interest-only payments on the mortgage until the construction is complete. The advantage of a progress draw mortgage is that it allows the borrower to access the funds needed to complete the construction as needed, rather than having to pay for everything upfront.
A completion mortgage is a type of mortgage that is used to pay off the balance of a construction mortgage once the construction is complete. With a completion mortgage, the borrower takes out a single loan to pay off the construction mortgage and cover the remaining balance of the mortgage. The borrower is typically required to make regular monthly payments on the mortgage, including both principal and interest. The advantage of a completion mortgage is that it consolidates the borrower's debts into a single loan, which can make it easier to manage and pay off. In summary, a progress draw mortgage is used to finance the construction process, while a completion mortgage is used to pay off the construction mortgage and cover the remaining balance of the mortgage once the construction is complete.
If you are uncertain of which option is best for you, please contact us, and we will gladly help you choose the best option for your situation. Lastly, when it comes to construction mortgages, there is your final option: A Take Out mortgage.
3. Buying from a Builder (Take Out) Mortgage Financing
These are mortgages for newly constructed homes, townhomes, and condominiums. You will require funds when the home is 100% complete. Your only mortgage option is a Completion Mortgage./p>
When using a Take Out mortgage to buy from a builder, the borrower typically enters into a contract with the builder to purchase the property once it is completed. The builder will then begin construction, and the borrower will make payments to the lender to cover the cost of the mortgage.
Pros of buying from a builder with a Take Out mortgage:
The borrower does not need to worry about securing financing for the construction of the property, as this is handled by the builder and the lender. The borrower can take advantage of any incentives or promotions offered by the builder, such as discounts or free upgrades. The borrower has the opportunity to customize the property to their liking, as they can choose from a range of options offered by the builder.
Cons of buying from a builder with a Take Out mortgage:
The borrower may have limited control over the construction process, as the builder is responsible for overseeing the work. The borrower may be required to pay a higher price for the property compared to if they were to buy a similar existing property. The borrower may have to wait longer for the property to be completed, as construction can take several months or longer.
Overall, buying from a builder with a Take Out mortgage can be a convenient option for borrowers who want to purchase a newly constructed home or property, but it is important to carefully consider the pros and cons before making a decision.
Want to find the perfect solution for your build?
If you currently require a commercial mortgage or are simply planning ahead, contact The Mortgage Professionals today. We will fully understand your situation and create a plan that fits your goals. We work with Dominion Lending Centres, Canada’s largest broker network, to help you find the right plan and connections.
The Mortgage Professionals are readily available to review the details of your new construction mortgage financing. We encourage you to ask questions and get the professional guidance you need to make an informed decision.
Contact us today for your free, no-obligation mortgage assessment. 👇👇👇
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