CONSTRUCTION MORTGAGES IN CALGARY

Completion Mortgage

A completion mortgage means that the loan is not initiated until the build has been completed, (or until you take possession of your home).  Typically, you are required to come up with a 5% deposit for the builder and then the builder will carry the cost of the build until completion.  When title is transferred to your name at the end of the build, you will be required to provide the remaining down payment funds if you intend to put more than the 5% deposit down on the property.  

As the mortgage doesn’t fund until the construction is complete, you are able to “rework” your mortgage up until (approximately) 30 days before your possession date.  You can make changes such as increasing your down payment, including upgrades or changing lenders for a better rate.
 
Advantages of a completion mortgage are that typically you don’t have to start payments until you’ve taken possession of the home and that you can rework the mortgage as you go to include upgrades.  The downside can be that if your build is delayed and takes more than a year, you lose your rate hold.  Also, if your income were to change over the year, the mortgage typically needs to be re approved, so this can put you at risk.  You’ll really need to stay in touch with your mortgage professional during this time.  

Draw or Progress Draw Mortgage

The second type of construction mortgage available is called a draw or a progress-draw mortgage.  This is set up so that the lender pays out money in increments throughout the building process.  

Draw mortgages are typically broken down into 4 or 5 draws depending on the lender and the build price.  

Here is an example of what a draw mortgage might look like:

Deposit of 16% – Completion of Excavation, Waterproofing, Weeping Tile 

Deposit of 26% – Substantial completion of Backfill, Framing, Sheathing, Roof complete, Rough Plumbing, Rough Wiring, Exit Door-Windows, HVAC Rough In, Insulation and Vapor Barrier

Deposit of 33% – Substantial completion of 

Drywall and taping complete, Basement Floor Poured, HVAC equipment

Deposit of 12% – Substantial completion of 

Interior doors hung, Flooring install, Electrical Final including fixtures, Plumbing Final including fixtures, Kitchen cabinets installed

Deposit of 13% – Substantial completion of 

Exterior Complete, Site works, Interior Finishing including Baseboard/Casing/Trim, Siding and Soffits

Inspections will be required throughout the building process to ensure completion prior to each “draw.”  There will be a fee to the borrower each time one of these inspections is required.   You will be charged interest from the date you make your first payment, and you won’t be able to change the terms of your mortgage after the builder advances the first draw.  

When the inspection is completed, if the inspector cannot confirm that the work has been complete, the lender will not advance the subsequent draw.  This means, that if the client or builder is not able to complete the work required, the funds cannot be advanced to start the next steps in the building process.  For this reason, your mortgage professional should be making sure that you have appropriate contingency funds in place to keep the build moving forward.
 
The progress-draw mortgage is beneficial to a builder as the builder doesn’t have to come up with the money for the build upfront.  This might allow you to negotiate a different price as a client.  It also may just be a requirement if you’re building a custom home.  

The advantage to the buyer is that it allows you to qualify and immediately fund your mortgage, so it takes the “changes to income” risk out of the equation.  In addition, it allows you to lock your rate immediately in volatile rate environments. 

The documents required for a draw mortgage are similar to those for a normal mortgage transaction outside of the increased scrutiny on the builders quotes.  Sometimes, there is some back and forth with the lender and the builder to make sure that the draws will work for both sides. 
 
Vacant land
 
If you’re starting with vacant land first, you will have a different process than if you’re purchasing both the lot and building from a builder.  Unless funds are no issue for you, we always recommend that you have a solid plan in place for your project if you’re purchasing vacant land.  This way, we can plan your land financing in conjunction with the financing for your build.

When it comes to buying raw land, the mortgage process can involve multiple lenders.  Potentially a major bank, credit union or even a private lender to help decrease the down payment requirements and free up more capital for your build.  Your mortgage professional will be able to guide you with that process.  

There are many additional considerations when buying vacant land such as, water source, environmental issues, zoning and more.  Make sure you lean on your Real Estate Professional to guide you through this process.