Construction Draw Mortgages

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Summary

(Jan 25, 2021) The dream to build your own home is alive and well, especially in Vancouver! Take a drive down any street in one of (metro) Vancouver’s neighbourhoods and you’ll see several projects on the go. This week I want to write about the mortgages that finance these incredible projects and what it takes to qualify for them. The mortgages are commonly referred to as Construction Draw Mortgages or Self Build Mortgages. If you or anyone you know are considering taking this route, read on and learn about the main qualification criteria.

The 3 Most Important Factors:

Building your own property is capital intensive. Be aware that you will need a substantial amount of front money to begin your project (even though you qualify for a construction draw mortgage). Front money is non-mortgage money and it will be required for pre-construction soft costs and the beginning stages of your build. Front money can be from any source; own sources, sale of previous home, equity proceeds from a home refinance, parents, or a rich uncle! If you used a mortgage to purchase the land (or property that you will tear down), your required front money will be even larger as the first draw advance will be applied directly to the outstanding mortgage balance (rather than the accrued construction costs). Once the draw proceeds have been applied to the outstanding mortgage balance, then the remaining balance (if applicable) will be made available to the owner to dispersed amongst the trades for work already completed. This pattern continues until the outstanding mortgage is eventually paid out, thereby, advancing the draws in their entirety to the owner to be used at their sole discretion for construction costs.
Mortgage draws are paid in stages AFTER the completion of specified construction milestones. This is often a misunderstood guideline amongst construction mortgage applicants. Once the work has been completed to reach a specific construction milestone, the lender sends an inspector to verify that the work has been completed, then the funds are advanced.
Here are the common construction milestones and their respective draw payout ratios:

Stage 1: Excavation, Foundation, Waterproofing, and Weeping tile (15% of mortgage proceeds advanced)
Stage 2: Roof completed, Backfill, Framing (25% of mortgage proceeds advanced)
Stage 3: Rough Plumbing/Electrical, drywall, furnace, exterior wall cladding (25% of mortgage proceeds advanced)
Stage 4: Doors hung, Floors finished, electrical/plumbing completed, kitchen cupboards installed (20% of mortgage proceeds advanced)
Stage 5: Exterior work completed, site works, landscape (15% of mortgage proceeds advanced)

Heads up on this stuff:

Many applicants underestimate the pre-construction “soft costs”. Look in to these costs and plan for them in your budget:
architectural fees
legal fees
re-zoning costs
community contributions
Government taxes
financing costs
Construction mortgage terms/conditions:
the amount of draws vary with lender (typically 4 or 5 draw stages)
interest begins to accrue as soon as the first draw is advanced and can be deducted from forthcoming advances
many lenders allow for third party contractor builders (rather than self builds). Self builds are certainly allowed, but have to abide by BC Housing Regulation by getting a Owner Builder Authorization