Construction Loans and Building Your Dream Home

Building a custom home, whether it's a city infill or a Muskoka getaway, is one of the most rewarding things you can do with a piece of land. Financing it, however, works nothing like a normal purchase mortgage.

Money arrives in draws, not a lump sum

A construction loan advances funds in stages tied to progress: typically at foundation, framing/lock-up, drywall, and completion. Before each draw, an inspector or appraiser confirms the work is done, and the lender advances a percentage of the value in place. You and your builder need a cash-flow plan that survives the gaps between draws.

Expect holdbacks

Ontario's Construction Act requires a 10% holdback on each draw to protect against liens from unpaid trades. Your budget has to absorb that timing, the holdback is released later, but trades want paying now.

What lenders want to see

• A detailed, costed construction budget with contingency (10-15% minimum).
• A fixed-price contract with a reputable builder, or, for self-builds, evidence you can actually manage the project.
• Plans, permits and a post-completion appraisal of value.
• Enough income and equity to carry both the construction loan and wherever you're living in the meantime.

Common structures

Some borrowers use construction-to-permanent financing that converts to a regular mortgage at completion. Others, especially with significant equity in an existing home, fund construction from a HELOC or a private facility and place a traditional mortgage at the end, often cheaper and more flexible than bank construction lending.

The broker advantage

Construction files die at banks more often than any other type, usually late and after wasted months. Knowing which lenders genuinely like construction, and how they like a file packaged, is most of the battle. If a build is in your plans, start the financing conversation before you buy the land, not after.

← All articles · Next: Bad Credit Mortgages: Your Options Explained →