Building your very own custom home is a dream that many people have. The cost for such a large scale project is much higher than solely buying a pre-built home. That’s where a construction mortgage comes in. These loans are short terms deals designed to finance any real estate project. Whether you are looking to build a new home, extend your property, or construct a commercial building, a builder mortgage is the best financing option for you.
How a Construction Mortgage Works
The way these loans work is quite simple. The landowner initially takes out a loan to cover all the related construction costs, which helps get the project started. Another reason for this is so that the builders have all the funds to complete the project. Once all the construction is complete, most people choose to refinance the construction loan into their permanent mortgage.
A Construction Mortgage Is Suitable for Those:
- Looking to build a custom home
- Developing a subdivision or commercial project
- Converting an existing building into a residential home
Construction Mortgage Rates
Due to the high-risk nature of these loans, expect a minimum 20% down payment. For approval, you’ll have to provide proof of the construction. You can provide evidence through a blue book, which will detail all the construction plans for the project. Also, you will have to show confirmation that you’ve contacted a trusted builder to take on the project.
Breakdown of the Costs
All construction-related costs will be initially taken care of with this loan. What do these costs include? We’ve broken it down below.
- The cost of the land: If you already own the land or property, this won’t factor in. If you are using the loan to purchase the property, then it will factor into the cost of the loan.
- Labour and raw materials: These are the essentials of the project, that add to the costs.
- Building fees: This could include anything from permit fees, engineering fees, or architectural fees.
- Livable Items: This includes any item that makes the home habitable, such as flooring, furniture, appliances, etc.
- Reservable costs: To protect if something goes wrong, you will likely see a 10% charge added to the total cost of construction.
FAQs About Construction Mortgage
A construction mortgage loan is designed to financially help those looking to build a new custom home, develop a commercial project, or transform an existing building into a home.
Yes. All the funds needed to construct the project are given to the landowner initially, which means a minimum of a 20% down payment is necessary.
Essentially this is a short term agreement, where a lender loans all the funds needed to construct the project to the landowner. Once the project is complete, the owner usually opts to refinance the construction mortgage into their permanent mortgage.
Here at Mortgage Residence, construction mortgages in Canada are one of our specialties. Don’t hesitate to give us a call for further details!