Financing a New Home Build

SERVING Ottawa and Surrounding Area, Quinte West, Prince Edward County, Kingston, Oshawa, Toronto, GTA - MOBILE

Jenna Weekes Mortgage Agent Level 1 C P (613) 242-1503 Email jennaweekes@jjmortgages.ca

A GUIDE TO FINANCING NEW HOME CONSTRUCTION

Building a new home can mean a lot of great things for you and your family, including the opportunity to live in the home of your dreams; to save money compared to buying a pre-built home; and the sense of accomplishment and satisfaction that comes with it.
However, financing the construction process can often be difficult, confusing and time consuming. As your licensed mortgage broker, it’s my job to remove stress and make it easier for you to realize your dreams.

On this page, I am going to break down the new construction mortgage process to make it easier to understand.

First of all, consider there are two parts to construction financing.

The "draw term," which is the initial construction phase providing the borrowers (for their builder/contractor/trades/suppliers) with funding during the various stages of their home’s construction.
The "end term" or "completion" mortgage is the second part (a normal mortgage) that kicks in once the construction is 100% completed.

Understanding the Draw Formula and How the Cash will Flow

During the draw term, money will be advanced in stages based on the work that has been completed. Typically a borrower will draw 4 or 5 times throughout the build. The draw amounts at each stage are driven by a formula based on the percentage of the project that is complete.

Percentage Complete / Getting Paid

Let's say the Excavation and Foundation are now complete - the borrower requests a progress inspection. An inspector/appraiser visits the site and confirms the percentage of the build that is complete. Based on the percentage complete, the draw amount is then calculated and disbursed to your lawyer, who then advances the funds to you or your builder. It is important to note: There is a 10% holdback from each draw to ensure that once the build is 100% complete, all contractors and trades have been paid in full.

It is important to fully understand the timing and amount of the draws before you get too excited about building, as failure to do so will lead to a world of grief and pain for everyone. The point is worth repeating: a lender will NOT give you money for the lot nor work yet to be completed! Someone has to pay for the lot, and then keep the builder, suppliers and tradespeople happy between draws. That 'someone' is either you or the builder, or the tradespeople have to agree to work without pay. If you don't have enough money to start or you run out of money before the next draw (hence the trades won't work) or the draw amount is not enough, the project grinds to a halt.

Types of Builds

The following describe how a borrower might choose to get a new home constructed:

Hire a Residential Home Builder - Builder gets paid by you in stages, and in turn pays his suppliers and tradespeople.
Hire a General Contractor to coordinate the project - Contractor, suppliers and tradespeople may be paid by you directly or indirectly via the contractor.
Self-Build - you act as the general contractor and hire qualified, licensed tradespeople to build the home. You must also be able to demonstrate in advance that you have the time, expertise, and industry contacts to complete the project on time*, on budget, and on spec. You will need to prove you have substantial cash resources necessary to carry the project from draw to draw.
Pre-Built - you decide to buy a prebuilt home from a builder and the builder gets paid only when you get the keys (upon completion). This is just a normal new home purchase mortgage, not a draw construction mortgage as described on this page.

If you would like to discuss whether financing a new home construction build is feasible, contact Jenna.

Call 613-242-1503

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