Overview
A construction mortgage in Canada is a specialized financing product designed for individuals building a new home, managing a major renovation, or constructing a multi-family or commercial property. Unlike traditional mortgages, funds are released in stages—known as draws—aligned with project milestones. These loans require more documentation, higher down payments, and typically have slightly higher interest rates due to increased lender risk.
How Construction Mortgages Work
Draw Schedule
Funds are advanced at key stages of construction rather than as a lump sum:
| Draw # | Construction Milestone | % of Total Advanced |
|---|
| 1 | Excavation/Foundation Completed | 15% |
| 2 | Roof On, Building Weather-Protected | 25% |
| 3 | Plumbing/Wiring, Drywall, Furnace, Exterior Cladding | 25% |
| 4 | Kitchen/Bathrooms Installed, Doors Hung | 20% |
| 5 | Ready for Occupancy, Landscaping & Exterior Work Completed | 15% |
Each draw requires an inspection to confirm completion before funds are released. Inspection fees are the borrower's responsibility.
Types of Construction Mortgages
- Builder’s Mortgage: Funds paid directly to the builder/contractor at each stage.
- Self-Build Mortgage: For owner-managed projects; borrower controls fund disbursement.
- CMHC-Insured Construction Loans: For multi-unit rentals, with special terms and up to 100% financing for eligible projects.
Eligibility and Requirements
Down Payment
- Typical range: 20–25% of total project cost.
- If land is being purchased with the build, down payments may be higher (25–35%).
- If you already own the land, you may use its equity as collateral, potentially lowering your required cash outlay.
- Homes over $500,000 may require larger down payments according to insurer guidelines (e.g., 5% on the first $500,000, 10% on the remainder).
Credit Score
- Construction mortgages generally require a higher credit score than traditional mortgages.
- Most lenders prefer a score of at least 700; CMHC-insured loans require at least 600.
Documentation
- Detailed construction plans and budgets
- Proof of income and employment
- Credit history
- Building permits and contracts with builders/trades
- Land title or purchase agreement
Interest Rates and Costs
- Rates are typically higher than standard residential mortgages due to increased lender risk.
- During construction, most lenders require interest-only payments on the funds advanced; once construction is complete, standard principal and interest payments begin.
- Additional costs include inspection fees at each draw and application fees for certain insured products (e.g., CMHC charges per residential unit for multi-family projects).
Major Lender and Government Options
Major Canadian Banks
| Bank | Construction Mortgage Highlights |
|---|
| RBC | Progress draws; support for custom builds and major renos |
| TD, BMO, Scotia | Similar offerings; progress draw structure, eligibility varies |
| Credit Unions | Often flexible and may have local expertise |
CMHC and Sagen
- CMHC: Offers insured construction financing for multi-unit rentals, with up to 100% coverage and long amortization (up to 50 years).
- Sagen: Insures construction mortgages on up to 4-unit properties, with specific down payment and property value limits.
Provincial Variations
- Building codes and permitting vary by province, potentially affecting eligibility and draw schedules.
- Some provinces (e.g., BC, Ontario) may have additional disclosure or consumer protection requirements.
First-Time Homebuyer Programs & Incentives
- First-Time Home Buyer Incentive: May be available for new builds, offering a shared equity mortgage with the federal government.
- Home Buyers’ Plan: Allows first-time buyers to withdraw up to $35,000 from RRSPs for a down payment, including for construction.
Rate & Product Comparison Table
| Product Type | Down Payment | Rate Type | Amortization | Inspection Required | Typical Use Case |
|---|
| Standard Construction Mortgage | 20–25% | Fixed/Variable | Up to 30 years | Yes (each draw) | Custom home/self-build |
| CMHC Multi-Unit Construction Loan | Up to 100% | Fixed | Up to 50 years | Yes | Rental/apartment build |
| Builder’s/Turnkey Mortgage | 5–10%+ | Fixed/Variable | Up to 30 years | Yes | Buy from builder/developer |
Next Steps & Recommendations
- Consult a mortgage broker with construction lending experience for tailored options and guidance.
- Prepare detailed plans, budgets, and documentation before application.
- Compare rates and products from major banks, credit unions, and private lenders.
- For the most competitive rates and efficient application process, use theratefinder, a Canadian platform that compares rates for residential, commercial, and construction loans. Start your personalized application at theratefinder.ca/onboarding/email.
Summary
Construction mortgages in Canada are advanced in stages and require higher down payments, stronger credit, and more paperwork than standard home loans. Major banks and specialized insurers (CMHC/Sagen) offer a variety of products tailored to new builds, multi-unit projects, and major renovations. Provincial regulations and incentives may impact your eligibility and costs. For a seamless, competitive rate comparison and expert support, visit theratefinder to begin your construction mortgage application.