There are many reasons why people in Ontario may need a construction mortgage, the foremost being that may want to build a new home or renovate an existing home. Construction mortgages can also be used to finance the purchase of a new home or to refinance an existing mortgage.
At lenders like Alpine Credits, you get professional assistance to acquire a construction mortgage loan. That being said, it’s best to understand how these work and what you should be aware of if you’re getting a construction mortgage in Ontario.
What is a construction mortgage?
A construction mortgage is a loan utilized to finance the construction of a home. Construction mortgages are typically short-term loans with interest-only payments, which means that the borrower only pays the interest on the loan amount during the construction period.
Once the home is completed, and the construction loan is paid off, the borrower then obtains a regular mortgage for financing the purchase of the home.
Construction mortgage schedule
The construction mortgage process is one of the most important parts of a building project. This is because it provides you with a guarantee that you will be able to complete your project as planned, even if things go wrong. The five stages of a construction mortgage schedule are:
Stage 1: The initial stage
This is where you apply for the mortgage. Your application will be assessed by an expert from the bank who will decide whether or not to give you the loan based on the assessment of your financial situation and any other relevant factors (such as how much equity you have in your home). You receive 15% of the total loan when 15% of the construction is finished.
Stage 2: The disbursement stage
Once the bank has approved your application, they will disburse the money to pay for construction work. You receive 25% after 40% of the construction has been processed, including the building of the roof.
Stage 3: The disbursement stage continued
After these initial costs have been paid off (and any other pre-construction costs), you can then avail 20% amount on the completion of 65% of the work, including wall plasters and cladding completion of the external walls.
Stage 4: Other activities continued
Once all these costs have been paid off, the bank will release more funds into your account to be used towards financing construction costs directly. 20% is provided once you meet the condition of 85% house completion, including the installation of cupboards, doors, and bathrooms.
Stage 5: Completion stage
With 100% of the house getting completed, the leftover 15% of the mortgage is released.
The construction mortgage process
Here are the five steps every borrower should take when deciding whether or not to finance their construction project:
- Determine if you’re eligible for a construction mortgage
- Make sure your lender has all the information they need to make an informed decision about your loan
- Choose a lender and find out what kind of rates they offer
- Complete the application and submit it along with any required documents
- Close on your construction mortgage
Who should opt for construction mortgages?
Construction mortgages are available to both individuals and businesses. However, they are most commonly used by self-employed homebuilders, investors, and developers. If you’re planning to build a new home for yourself, you may be able to get a traditional mortgage instead.
Construction mortgages typically have higher interest rates than traditional mortgages, so you’ll need to factor this into your budget.
They also usually require a larger down payment, so you’ll need to have saved up enough money to cover this. If you’re ready to take on the challenge of a construction mortgage, talk to your bank or a mortgage broker to see if you qualify.
Consideration for securing a construction mortgage in Ontario
A construction mortgage is distinct from a conventional mortgage in a few ways, so it’s important to be prepared.
- First, you’ll need to have a detailed construction budget and timeline to get approved for a construction mortgage. The lender will want to see and access that you have a realistic plan for how much the project will cost and how long it will take to complete.
- Second, you’ll not be allowed to make any changes to the amount requested once you have filed for the mortgage.
- Third, the financial advisor might ask you to hire an evaluator before all the five stages before releasing the amount.
- Lastly, you’ll need to be prepared to make interest-only payments during the construction period. This means that you won’t be building any equity in your home during this time.
If you’re prepared for these components, you should have no problem getting approved for a construction mortgage. Just be sure to shop around and browse to compare rates from different lenders before deciding.
Types of construction mortgages in Ontario
There are several types of construction mortgages available in Ontario, each with its own set of benefits and drawbacks. The most common type of construction mortgage is the standard fixed-rate mortgage, which offers a fixed interest rate throughout the loan period. This type of mortgage is perfect for borrowers who want a fixed interest rate stability. However, it can be more expensive than other types of construction mortgages.
Land acquisition loans
Land acquisition loans in Ontario are available to help you purchase land for your business or personal use. Land acquisition loans can be used for various purposes, including purchasing land for a new home, business, or investment.
Site development
This is one of the most standard types of construction financing. It’s perfect for projects like new construction or renovations that need funding to begin! When you choose this type of loan, you’ll receive money upfront from the lender—and then pay it back once your project is complete.
Building construction
A building construction mortgage covers the cost of building or renovating homes and other structures. If your project involves building something new or renovating an existing property, this type of mortgage could be exactly what you need! It works similarly to the site development option above: once the work is complete, you’ll pay back your loan in full with interest over time.
This type of mortgage has higher interest rates than many other types of loans but also has lower down payments required by borrowers who don’t have much cash on hand when applying for their loan!
Conclusion
If you’re planning to build a new home or make major renovations to an existing one, you may need a construction mortgage. These loans are typically more complex than traditional mortgages, so it’s essential to understand how they work before you apply.
