It really is hard to find the perfect house. There’s always going to be that one (or five) thing that just doesn’t fit what you’re looking for.
So, rather than try to find the right house, why not build the right house?
Building a home may require a different mortgage product, so let's get into the nitty-gritty of the mortgage process for building a new home in Canada.
What Is The Mortgage Process For Building A New Home In Canada?
When you’re building a new home, the most common mortgage you’ll be looking at is a construction mortgage.
This allows you to finance the purchase of a house that may not yet exist. You may need this type of mortgage if you are designing a home entirely from scratch.
But, what’s the difference between a construction mortgage and a standard mortgage?
The difference is how the mortgage funds are paid out. A typical mortgage is paid in a lump sum to the home seller on closing day, while a construction mortgage is paid in smaller increments as each construction phase is completed. These smaller payments are sometimes called “draws.”
While some lenders use the terms "construction mortgage" and "builder mortgage" interchangeably, other lenders consider them distinct types of loans.
Sometimes, a "builder mortgage" refers to when a home builder builds the house and you pay a large deposit on the home. After the deposit, you'll be responsible for paying the mortgage through your regular mortgage payment.
How Do Construction Mortgages Work?
Like every mortgage, you have to complete the pre-approval process with your mortgage professional. This includes verifying your income, employment, credit score, and downpayment.
Typically, construction mortgages require a minimum of a 20% downpayment. Of course, this depends on the product and lender you’re working with. For example, with some products, any funds you contribute to the overall transaction can count towards your down payment. This can include the land purchase, architectural drawings and permits.
When you work with this type of product, you will set a draw schedule with your lender. This is the number of times you will be drawing from the mortgage to make payments on your build.
It’s important to note that these draws cover the expenses to build the home; not the additional expenses like decor.
When you finance your home with a construction mortgage, inspections are mandatory at every step of the way before the next draw is approved. As the borrower, you will likely be responsible for paying for each inspection, but some lenders deduct the inspection fees from each draw.
During the draw phase, many lenders may only require you to pay interest on the amount that you’ve borrowed. Your interest only monthly payment amounts will be determined by your draw schedule and how much it costs to construct the home.
In some cases, your construction mortgage will convert to a traditional mortgage after the building is complete and when an occupancy certificate has been issued. This outlines both your principal and interest payments, interest-rate, term, etc.
Advantages and Disadvantages of A New Build
Pros
Freedom of Choice
The obvious benefit of building a new home is that you have more freedom and choices when it comes to the specifications of your home. From the flooring and finishes to the floor plan and backyard, your home can be exactly what you’ve been dreaming of.
Flexible Terms and Conditions
While you’ll need to provide a detailed blueprint to your lender, the other terms of these mortgages can be flexible. Many lenders are willing to make things easier and fit the financial needs of their borrowers.
Overseen by a Third Party
While it might feel annoying to have inspections every step of the way, it can actually be a blessing. This oversight will guarantee that you stay on track during the build and catch potential issues you may have missed.
Cons
Stricter Requirements
Because construction mortgages can be riskier than traditional mortgages, you’ll likely have stricter requirements to get approved. For example, your credit score will need to be higher than it would be for a traditional mortgage.
Larger Down Payment
When getting a mortgage to build a new home, a larger down payment is often required – usually around 20% to 30%.
Can You Build A New Home With an Existing Mortgage in Canada?
You can only purchase a new build home with an existing mortgage if you have a builder mortgage. For example, you are purchasing a new home that’s being designed and built by a home builder. And even in this instance, you would be transferring your existing mortgage to the new home.
If you want to buy a plot of land and design your own home, you will have a construction mortgage. This is a new mortgage so your existing mortgage cannot be transferred.
Building Your Ultimate Home
So, when all home options on the market aren’t checking your boxes, getting into a new build might be the answer.
It’s like you’re the star of your own HGTV show! And that’s really all our dreams, isn’t it?
With a construction or builders mortgage, we highly recommend working with an experienced broker who has worked with these products before. Our amazing team has worked with many of these mortgages before, so they’ll be able to answer any questions you have.