I've put together a list of common builder mortgage questions to help you better understanding the process of building a home.
Two types of builder mortgage products are available to build a home. A draw mortgage (or progress draw) and completion mortgage.
The key difference between a draw mortgage and a completion mortgage is when the funds are disbursed. A draw mortgage releases funds in stages throughout the construction process, while a completion mortgage provides the full mortgage amount once the construction is finished.
Some people can qualify to stay in their current home while building their new home. This will have to be approved by the lender. This approach, if approved by the lender, can be a more economical strategy than selling your current home and moving to rental accommodations. Provided you qualify, the lender will require you to have access to the full down payment (refinancing your current home can be an option) and be able to support your current mortgage and property expenses and the new mortgage and property expenses in case your existing home does not sell.
For peace of mind and to ensure you have cash to work with, many people opt to sell before starting construction on the new home and reside in short-term rental accommodations or with other family members.
Once the first draw is finalized, the mortgage can not be changed. No unauthorized upgrades can be added.
If my draw mortgage has been approved as an insured mortgage, but I can now afford an uninsured (conventional) mortgage, what happens to the insurance premium?
As the mortgage was approved as an insured mortgage, you will still have to pay the original mortgage premium to the insurer, as this is part of the original terms and conditions, regardless of whether this mortgage is cancelled or amended to conventional.
Can I port my existing mortgage to a new construction mortgage to eliminate or reduce prepayment charges?
For completion mortgages, you must return to your existing lender with a new mortgage to maintain the portability features. The new mortgage must be fully funded within 90 days of the old mortgage being paid out. Note that conditions vary by lender. Other qualifications may apply.
Land draws are subject to approval for conventional mortgages when the land is being purchased, has been purchased, and is free and clear, or if the land secures an outstanding loan.
Lenders will only fund if the house is 100% complete (less 3% allowance for seasonal holdbacks.) This means that the house can be completed to 97% and the only thing that is not complete is siding, landscaping, or pouring the driveway. If this is the case, the lender will only fund 97% to the solicitor, holding back the 3% until a final inspection advises the house is 100% complete.
Generally, there is no set amount of time. Typically at the 1 year mark, the mortgage will go into repayment and regular mortgage payments need to be made.
On a progress draw mortgage, do I pay interest on the whole amount I want to borrow or just what I have borrowed so far?
You only pay interest on the amount you have actually borrowed. Your monthly interest payments will increase as your home progresses and you borrow more.
How does the Construction Lien Act affect my construction project, and how is it handled during construction?
Any person or company that supplies your project with materials or labour has the right to place a lien against the title of your home as a method of recovery in the event of non-payment. The Construction Lien Act requires that an amount be held in trust from which a lien may be paid. The lender will instruct the solicitor to hold back an amount (usually 10% of each draw payment) until 45 days after substantial completion of the home. You should consult with your lawyer and builder regarding the impact of the Construction Lien Act on your project.