Home Construction

A new construction mortgage is a specialized type of mortgage designed for those who are building a home rather than purchasing an existing property. Financing a newly constructed home comes with unique requirements, stages, and considerations. Here’s what you need to know:

Types of New Construction Mortgages

There are two main types of new construction mortgages:

1) Completion Mortgage

A completion mortgage is used when you purchase a new home from a builder that is already under construction, and the full mortgage is paid upon completion of the build.

You generally make a down payment to the builder, with the remainder of the payment (via the mortgage) transferred once the house is completed.

The mortgage funds are advanced after the home is finished, and you take possession of the property. This type of mortgage is more common with builder-financed developments (e.g., new subdivision homes).

2) Construction or Progress-Draw Mortgage

A construction mortgage is for people building their home from the ground up, either through a contractor or as a self-build project. With this type of mortgage, funds are advanced in stages, or “draws,” throughout the construction process.

There are typically three to four draws during construction: one at the start, one when the foundation is completed, one at the halfway point (often when the house is “lock-up” stage), and the final draw when the home is finished.

Interest is only charged on the amount of the mortgage that has been advanced at each stage of the project, which means lower payments during the construction phase.

Down Payment Requirements

For a completion mortgage, the down payment requirements are similar to a traditional mortgage. You can put down as little as 5% if the property is insured by the Canada Mortgage and Housing Corporation (CMHC), Sagen, or Canada Guaranty, but many lenders prefer a minimum of 10-20% down for new construction.

For a construction mortgage, the down payment requirements are typically higher because there is more risk for the lender. You will usually need to provide at least 20% as a down payment. This percentage can increase based on the type of construction (self-build vs. contractor-led) and the location of the build.

Mortgage Qualification Criteria

Income and Debt Ratios: As with any mortgage, your ability to qualify for a new construction mortgage will depend on your income, debt-to-income (DTI) ratio, and credit score. Lenders will carefully assess your financial ability to carry the mortgage throughout the construction phase and after the home is completed.

Credit Score: A good credit score, typically 680 or higher, is generally required to qualify for new construction mortgages, especially if you’re applying for a construction mortgage where funds are advanced in stages.

Appraisal: Lenders will require an appraisal of the construction project. For completion mortgages, the property will be appraised at the finished value. For construction mortgages, the lender may require multiple appraisals to assess the property’s value at different stages of construction.

Construction Timeline and Mortgage Draws

Progress Draws: With construction mortgages, the lender releases funds in stages based on construction progress. Each phase is typically inspected by a certified inspector or appraiser before the funds are released. The draws are as follows:

Initial draw (upon commencement or land purchase)
Foundation completion
Lock-up stage (when the building is weatherproof, but interior work is unfinished)
Completion of construction (when the home is ready for occupancy)

Interest Payments During Construction: You will pay interest on the amount of the mortgage that has been drawn down during each stage. As more funds are advanced, your interest payments will increase until the home is fully completed and the entire mortgage amount is advanced.

Construction Timeframe: Many lenders set a specific timeframe (usually 6 to 18 months) in which the construction must be completed. Delays can affect your financing, so it’s important to ensure the builder or contractor is reliable and efficient.

Land Ownership and Financing

If you are building on land you already own, you may be able to use the land as equity toward the down payment of the construction mortgage. If you do not yet own the land, you may need to secure separate financing to purchase it or include the cost of the land in the construction mortgage.

If financing for the land is included in the mortgage, your lender may release funds for the land purchase as the first draw, and subsequent draws will be used for construction.

Builder’s Role and Contracts

Builder’s Contract: If you’re hiring a builder, your lender will likely require a detailed contract that outlines the cost of construction, building plans, materials, timeline, and any warranties. A comprehensive contract is crucial to ensure that the builder delivers the project on time and within budget.

Reputable Builder: Lenders often require that the builder is reputable and certified. They may ask for proof of the builder’s qualifications, certifications, and experience. In some cases, the lender may not approve the mortgage unless you work with a registered builder (such as members of a home warranty program like National Home Warranty in B.C.).

Interest Rates

During the construction phase of a construction mortgage, you typically pay interest only on the amounts that have been advanced. Once the home is completed and the final draw has been made, the mortgage transitions to a regular repayment schedule, and you can lock in a fixed or variable interest rate.

Interest rates for completion mortgages are usually comparable to rates for a traditional home mortgage, with fixed or variable rate options available from the start of the loan.

Mortgage Insurance for New Construction

If your down payment is less than 20% for a completion mortgage, you may need to pay for mortgage insurance (from CMHC, Sagen, or Canada Guaranty).

Construction mortgages generally require a down payment of 20% or more, meaning mortgage insurance is typically not required, though requirements vary by lender.

Closing Costs and Additional Expenses
Building Permits and Fees	You will need to obtain various building permits and approvals from the municipality where the home is being built. These can add several thousand dollars to the cost of construction.
Development Charges	Some municipalities charge development fees for new builds, which cover the cost of infrastructure improvements, roads, parks, etc.
Home Inspections	While new construction homes typically don't require a traditional home inspection, your lender will likely require inspections at various stages of the build (especially for construction mortgages).
Warranty Programs	In some provinces, new homes must be covered by a new home warranty program. For instance, in B.C,  new homes built by licensed residential builders must be covered by mandatory, third-party home warranty insurance, which at a minimum provides 2 years on labour and materials (some limits apply), 5 years on the building envelope, including water penetration. 10 years on the structure of the home.Builder warranties are common in other provinces as well.

Risks and Considerations

Construction Delays: Building a new home can take longer than expected due to weather, materials availability, or labor shortages. These delays can affect your mortgage draw schedule and your budget.

Cost Overruns: Construction costs can exceed the initial estimate, so it’s essential to have a contingency fund (usually 10-15% of the construction budget) to cover unexpected expenses.

Market Risks: If the real estate market changes during the construction period, it could affect the value of the home when it’s completed, potentially impacting your ability to refinance or sell the property in the future.

Final Steps

Once the construction is completed, a final inspection and appraisal are conducted to ensure the home meets all specifications, building codes, and value expectations. After that:

Mortgage Transition: The construction mortgage is converted into a traditional mortgage, with regular amortized payments.
Homeowners Insurance: You will need to arrange homeowners insurance before moving in to protect the newly built home.

Mortgages for new construction homes come with more complexities than traditional mortgages. It’s essential to plan for potential delays, unexpected costs, and careful coordination with your builder or contractor. Working with an experienced mortgage broker, can help guide you through the process, ensuring you get the best mortgage for your specific needs.