Building a custom new home in 2024? Let us guide you through the ins and outs of a construction mortgage

So – you’re building a home in 2024, “Year of the High-Interest Rate.” Your dreams are big, and for that, we salute you. While it may not be the easiest time to build in Ontario’s history, it is a time when there is a great need for housing – and your build is a step in the right direction. 

While we can’t guarantee that you won’t encounter more than your fair share of red tape in the form of municipal bureaucracy, we can lead you through the other key factor that keeps builders up late at night – home financing! Whether you’re looking for a traditional construction mortgage, out-of-the-box financing solutions or you really aren’t sure what you need to get your idea off the ground (and into the ground), Buckley Mortgage Team has a wealth of knowledge on the subject and we’d like to share it with you.

 

The Standard Construction Mortgage

The first of our recommended solutions for those building a home, the standard construction mortgage, is ideal for those who own or are purchasing vacant land but who may not have other assets to use or borrow from. 

In Ontario, a construction mortgage is a financial tool for individuals or developers looking to build a new home. Typically, this type of mortgage is structured to provide funds in stages, known as “draws,” throughout the construction process. Initially, after the purchase of land or building lot, land engineering costs, home design and building permits, the borrower receives a loan amount based on the project’s estimated value and construction plans. As construction progresses, the lender conducts site inspections to ensure that the work is being completed according to plan before releasing the remaining draws.

Throughout the construction period, borrowers usually make interest-only payments on the loan amount. Once the construction is complete, the mortgage transitions into a traditional mortgage or another suitable financing arrangement, depending on the borrower’s preferences and circumstances. 

It’s important for borrowers to work closely with mortgage brokers who specialize in construction mortgages to ensure smooth funding and adherence to timelines, as well as to navigate any issues that may arise during the construction process (and they will arise, we can almost assure you). Additionally, borrowers should be prepared to provide detailed project plans, budgets, and timelines to lenders to facilitate the process.

 

Leveraging Other Assets to Build

While the standard construction mortgage may be more common, it is not the only or even the easiest option for those looking to build a custom home. If you currently own a property and have sizable equity within it, you may want to consider obtaining financing on the home that already exists. 

The reason this may be simpler for some is that you will not be required to provide the same level of planning documentation when borrowing against a house that already is standing and occupied. Further to that, instead of receiving draws based on how much you’ve completed on your build, you can potentially access the full amount needed at one time.

Two things to keep in mind when opting for this route:

1) Your payments will likely be interest + principle for many lending products, meaning your monthly budget may be impacted more while carrying both properties.

2) Keeping track of your budget will be imperative for you to complete the build. No one else will be checking in to see if you’re on schedule or if funds are extending as needed.

 

Flexibility is Your Friend 

“The custom home building environment at the moment is still busy”, says Rob Abbott of Great Lakes Custom Homes Inc., “but one of the problems that you will find out there is that the costs of building a home keep changing. Everyone has heard that the price of lumber has returned to more normal costs, the problem is that lumber only accounts for about 10% of the cost to build a home. All the other costs of building a home have continued to rise even after the pandemic has ended. Because of this people looking to build a new home should be ready to be flexible in their budget.”

Due to high-interest rates across Canada, the cost of borrowing itself is currently one of the most common budget overages. The longer your build takes, the higher this cost will soar because the total amount owing will increase as the build progresses. 

Rob continues, “In the current environment for building homes we are still experiencing longer than normal lead times when ordering windows, kitchens, siding and engineering…  Add in the fact that it is taking longer than ever to receive permission to start a new home construction project from local municipalities and that if you require changes to the plans after the project has started, then the chances of your build taking longer than you expected to be completed are almost assured. So budget in your finance costs for the worst-case scenario to help guarantee that your carrying costs don’t cost you that dream kitchen that you wanted or you end up with mud for a lawn because there’s no money left to landscape at the end.”

No Matter Your Situation, We are Here to Guide You

At Buckley Mortgage Broker, we understand construction mortgages. We also understand complex situations – especially those for self-employed builders! Our vast experience paired with our partnerships with more than 70 lenders gives us the ability to find solutions for a wide range of clients. Let us help you turn your custom-built dreams into reality.