Finance your dream home from the ground up
If you have been searching and searching and haven’t yet found your dream home, building one from the ground up might be the right solution for you.
A few things to consider if you are thinking of undertaking a home build:
- If you do build, you’ll need to secure a special construction/builder’s mortgage. Note: There can be additional financing costs for this mortgage type.
- Do you currently own land, or will you have to purchase a property? Vacant land may require separate financing, or if you currently own a home, you may be able to secure a Home Equity Line of Credit (HELOC) to purchase the lot.
- Be sure to do your research.Ensure you will be able to obtain permission to build from the municipality and/or conservation authority. Also research zoning, environmental, the availability of utilities, high-speed internet, etc. Should something need to be addressed, the cost of these items can be significant and will need to be addressed in the build budget.
- Ensure you have a home builder/ general contractor you trust.This will ease much of the work around the build and managing the sub-trades. As well by Ontario law, a build contractor is required to provide a warranty (typically through Tarion). Be sure to carefully review what is covered under the policy. There is also the option if you have the background, expertise, and disposable time to manage the build yourself (“self-build”). Note that some financial institutions may charge higher fees for a “self-build”, as it poses more risk, and requires you to obtain an “all risk builder’s insurance” rider on your home insurance policy.
How does a construction mortgage work?
Funding for the build project will be advanced by the financial institution in stages, based on the completion of the build. There are generally two methods used to calculate how much is given in each stage:
- Progress Draw Mortgage: A home inspector will be sent to the property to review the progress of the build to ensure it is going to plan. The inspector completes a report for the financial lender, and if all the components of the stage are completed, they will advance funds. Should the inspector indicate the project is not progressing on plan, the financial lender may hold back some of the scheduled funds until the construction is back on track. Each time the inspector visits the project, a fee is charged (typically to the borrower). Typical stages are: foundation (excavation, foundation, backfill & framing); shell (windows, doors, exterior finishes, and roof); drywall (includes plumbing, electrical, HVAC, duct system and insulation); finishing (drywall, painting, finished flooring, electrical fixtures, finished plumbing and carpentry).
- Percent Completed Draw Mortgage: This method is a little more fluid. The inspector completes a report for the lender and indicates the percent of the project completed and that percentage will reflect how much of the total mortgage is funded to the borrower.
For both types, as part of the Construction Liens Act there is a required 10% holdback amount that is kept aside from each draw and accumulates to the end of the project. Once the build has been completed and you’ve received the official occupancy certificate from the local building inspector, there is a 60-day waiting period before the lender releases the accumulated holdbacks.
Separate to this, it is recommended that you have 10% or more of your home’s build cost set aside for unexpected and extra costs that can arise throughout the project.
Building a new home and acquiring a builder’s mortgage may not be for everyone; however, a well-thought-out and thorough financial and build plan will help to ensure a smoother path to creating your dream home.