HOME BUILDING & CONSTRUCTION MORTGAGES

In today’s competitive market, building a brand new home can seem very attractive for homebuyers.

There are two kinds of construction mortgages.   The first we refer to as “completion” and “progress draw”.

COMPLETION MORTGAGE:

This type of Mortgage is usually offered by non-custom home builders.   The homebuyers will normally be required to put down a deposit of 5% or 10% at the beginning and not be required to pay the home builder until the end of construction.  We are now offering a 12-month rate hold for completion mortgages that are insured (less than 20% down or clients opting to pay for the insurance)

Things to consider:

• Most lenders will not lock in the final mortgage rate until 120 days before the possession date.
• Most home builds will take between 4 months & 12 months to complete.
• It is important that the home buyer really monitor their finances during the build period.   Do not take on more debt without checking with us first.  Do not change employers.  Do not miss any credit payments which could negatively affect your credit score.
• Land Transfer Taxes will typically be higher as they will be paid when title transfers.
• There will not be any interest charge by the lender during construction.
• Property taxes will accrue from the day the title transfers and usually take a municipality up to 2 years to assess the property.  So Taxes will only be payable from the completion date/possession date.
• It is recommended that in any construction financing taxes be collected and paid for by the lender.

PROGRESS DRAW MORTGAGE:

Progress draw mortgages are the most complicated.   Each lender (if they even will fund this type of mortgage) will have different criteria and costs involved.   The home-building process is usually broken up into five stages.

1. Land Advance
2. Basement/Foundation (15-17% Complete)
3. Framing & Roof (30-35% Complete)
4. Lock Up (60-67% Complete)
5. Completion (97%-100% Complete).

At each stage, the lender will advance a pre-determined amount of money.  However, this doesn’t always match the home builders’ contract.  So it’s important for a homebuyer to understand that it’s recommended to have extra cash on hand to help with any contractual shortfalls.

Things To Consider:

• Land Transfer Tax will be much lower because it will only be levied on the cost of the loss.
• Property taxes will accrue from the day the title transfers and usually take a municipality up to 2 years to assess the property.
• The interest rate during construction will be based on the Prime Rate.  This rate is usually between Prime + 1% and Prime + 5% and can easily wipe out any land transfer tax savings.
• The construction contract will rarely match up to the prescribed draw schedule by the lender.  It is important to identify the shortfalls to understand how much extra cash would be required.
• Some lenders will require as much as a 30% cost overrun provision to cover add-ons and change orders to the construction.
• Many homebuilders receive incentives from big banks to provide financing.  If you are building a home ask what’s in it for the home builder and what’s in it for you the client to use the builder’s bank.

We would love to help you with either option.   Ensure your builder is a reputable builder part of the provincial association and offers a nationally recognized home warranty.

For more information, please contact us using the form below.