Building a home may take a couple years, but getting a mortgage only takes days. I’ll help you understand the options available for a self-build mortgage.
NEW CONSTRUCTION FINANCING OPTIONS:
1. Self-Build Home
Self-Build Home is when you act as your own contractor; hiring subcontractors to complete the work. Your mortgage options are:
- Progress Draw Mortgage – The bank lends money to the builders in three stages. First is advanced at rough-in completion, second advance at the finishing stage, and third at the possession stage.
- Completion Mortgage – The mortgage will not be in your name until the possession date.
2. Self-Build: Builder/Contractor (turn key)
This option is available when you are dealing with a contractor to build your home. In this scenario there are the same two mortgage options (Progress Draw Mortgage and Completion Mortgage). Generally the builder will request to take the Progress Draw option. That way the mortgage will help him financially at each stage of construction.
3. Buying from a Builder (take out)
This is likely the easiest option as you purchase the ready-made home directly from the builder. In this case the only option is a Completion Mortgage since the home is already built.
Self-build mortgages are taken for the property in which you are building. Mortgage funds are given to you in stages, rather than as a single lump sum. Initially to buy the land, again at the start of construction, another at the stage of completion, and finally at the time of legal possession. It’s very important to thoroughly plan for the construction of your home. Ensure you understand every stage involved from start to finish.
6 Tips for a Successful Self-Build:
1. Take neighboring homes into account. Having the most expensive property in the area can make the home difficult to sell.
2. Build for resale. No matter how long you intend to stay in the house, it will be sold at some point. It’s generally not a good idea to build everything customized to you.
3. Get the best contractor your budget will allow. When building a house, quality is the most important thing.
4. Be prepared for delays. There’s a lot of moving parts in the construction of a home, all of which rely on each other and the environment.
5. Monitor the progress. During construction, a lot can be accomplished in a short amount of time. Catching mistakes early on can save a lot of headaches later.
6. Watch construction allowances. Generally, within the total cost of building you will be given allowances for items such as flooring (carpeting and vinyl), lighting, plumbing fixtures, etc. Be certain you can get the materials needed within the allowance amount.
Progress Draw Mortgage
A Progress Draw Mortgage provides funds upon completion of different stages of construction. This mortgage will be under your name only when possession has been given to you. There are usually 3 draws at 35%, 65% and 100% completion.
- After completion of each draw, a Progress Inspection Report is conducted. This report gives details of the percentage completed before advancing money for the next draw.
- Most lenders assign two mortgage numbers in a progress draw. One that represents the actual draw of funds and another for the final advance of funds. Once the house is 100% complete and final funds have been advanced. Mortgage two is the “completion” mortgage.
- The last advance will not be released until the final inspection confirms completion. Also the final mortgage documents must be signed by you and returned to the lender by your lawyer (notary).
Please note– This feature is not available in Quebec.
This option is when you are buying a 100% complete home.
- When submitting an offer to purchase a property you are required to make a down payment.
- Often, the down-payment is required in several installments.
- Once the house is complete and ready for occupancy, you will require funds from a mortgage to pay the builder the balance. Example: A client submits an offer to purchase their new build. The total cost of the home is $300,000. It will be ready in 12 months.
Payments are due as follows:
- $5,000 With Offer to Purchase
- $5,000 In 30 Days
- $5,000 In 60 Days
- $5,000 In 90 Days
- $280,000 Due on closing date 12 months from now
In the event that home completion takes more than 90 days, rate caps are available for up to 12 months, depending on mortgage type and location. A rate cap locks in the maximum interest rate a client will receive for their mortgage. This is based on the rates at time of application. Rate caps are available on both Progress Draw and Completion Mortgages. All mortgages are subject to eligibility requirements and will vary by lender.