Finding the home of your dreams in the perfect location at the right price and the right time is not always possible. This is one reason why many opt to build their own brand new home rather than purchasing an existing home. However, paying for the costs of building your own home up front is not always feasible.
What is a Home Construction Mortgage?
Financing the construction of a new home differs from that of buying an existing home, and can be a more rigorous process for the home-building client. A construction loan,also known as a ‘home builders mortgage’ or a ‘self-build loan’, is a short-term loan used to finance home construction.
Lenders will request more information, and often require more money up front. That said, there are a couple of options available for clients building their own home, giving clients the ability to choose an option that best suits their financial needs.
Types of Home Construction Loans in Canada
Canadians have the option of building their own homes using either a ‘Completion’ mortgage, a ‘Progress-Draw’ mortgage, or a combination of the two.
Progress-Draw mortgages are loans that carry clients through the building process and are given on a progress advance basis. The full amount that you need to borrow is distributed at different construction stages, otherwise known as ‘’draws’’. In order for the next payment to be released, each stage has to pass an inspection. Typically, these loans entail 3-4 draws distributed over an 18 month period with construction to be completed within 15 months of the first advance. Construction milestones usually include foundation, lock up, dry wall and completion. Once the home is finished and the full amount of the mortgage has been advanced, you may renew into a fixed rate mortgage or variable rate mortgage without penalty.
Completion mortgages are signed contracts and sometimes require a small down payment, though they only need to be repaid in full when a home is completed. With completion mortgages, the lender does not expect any funds until you take possession of your new home. The benefits of this option are that you do not have to make any payments prior to taking possession, you can continue to upgrade the mortgage and the lender does not require all final information until 30 days prior to the possession date. However, it is important that pay attention to your finances during the build process to ensure nothing affects your financial position, credit and loan eligibility. This can include things like switching jobs or purchasing a new car.
In general, Progress-Draw mortgages are preferred by home builders as it helps them manage their cash flow and receive portions of funds at predetermined stages. However, this type of loan does come with some extra costs such as inspection costs and interest payments. You are also unable to add upgrades throughout the build process with a draw mortgage after the first advance.
Obtaining a Home Construction Loan
When planning on building a custom home, it is wise to discuss financing with your lender to give you a realistic budget and determine whether or not you are eligible for financing. You can get pre-qualified or pre-approved for a home construction loan. The most important information lenders will examine is whether or not you have the ability to pay back the loan.
If you already own a lot it can be used as equity along with any other property you own. The first advance of your loan will be available as equity take-out. If you have not purchased the land yet, a first advance can be used to help you buy a vacant lot.
Build Your Home in Stages
At Lamelli, we understand that you may not be able to build the home of your dreams all in one go and that even once you have, your needs may change over time. That is why we have developed agile designs that can be scaled up over time. Our ‘Growing Homes’ let you begin with the core essentials of your home and add modules as your needs evolve or funds become available. This strategy can save you a lot of money as home construction loans often come with higher interest rates than traditional mortgage loans.
Are you planning on building a custom home? Lamelli’s prefab homes and modular construction strategy give you all the luxuries of modern living at a price you can afford. Contact us today to find out how Lamelli can make the construction process smooth and fast to minimize the size of your home construction loan.