Overview
A construction mortgage in Ontario is a specialized loan that provides funding in stages (draws) to build a new home or undertake major renovations. The process and requirements differ significantly from traditional mortgages, with stricter documentation, higher down payment requirements, and staged fund advances tied to construction milestones.
How Construction Mortgages Work in Ontario
Key Features
- Funds Disbursed in Stages: Unlike traditional mortgages, where the total amount is given at closing, construction mortgages release funds in increments as each construction phase is completed and inspected.
- Interest-Only Payments During Construction: Borrowers typically pay interest only on the funds drawn until the build is complete. Afterward, the loan converts to a standard mortgage with principal and interest payments.
- Inspections at Each Stage: Lenders require progress inspections before releasing each draw, ensuring the construction aligns with approved plans and budget.
- Types of Construction Mortgages: Most lenders offer two types:
- Builder’s Mortgage: For those hiring a contractor or builder.
- Self-Build Mortgage: For those managing the project themselves, subject to experience and skills verification.
Eligibility and Requirements
Typical Requirements
- Down Payment: Usually 20–25% of the total project cost, sometimes higher for self-builds or higher-risk applicants.
- Credit Score: Minimum of 680; some lenders may require 700 or higher for the best rates.
- Documentation:
- Detailed construction plans and budget
- Building permits and contracts
- Proof of income and assets
- Good credit history
- Builder Qualifications: For self-builds, proof of experience is essential. Contractor-built homes must typically be protected by the Tarion New Home Warranty in Ontario.
Typical Construction Draw Schedule
| Draw # | % Completion | Milestone | % Mortgage Advanced |
|---|
| 1 | 15% | Excavation, foundation | 15% |
| 2 | 40% | Roof, building weather-protected | 25% |
| 3 | 65% | Plumbing, wiring, drywall, exterior cladding | 25% |
| 4 | 85% | Kitchen/bathrooms installed, doors hung | 20% |
| 5 | 100% | Ready for occupancy, all work completed | 15% |
Source:
Interest Rates and Terms
- Interest Rates: Typically higher than conventional mortgage rates due to increased lender risk.
- Rate Type: Fixed or variable, depending on lender and borrower profile.
- Term: The construction mortgage converts to a regular mortgage upon completion, with 3–5 year fixed terms being common.
Major Ontario Lender Offerings
| Institution | Product Name/Type | Key Features |
|---|
| Meridian Credit Union | Construction Mortgage | Staged advances, interest-only during build, converts to regular mortgage after |
| Northern Credit Union | Contractor-Built / Self-Built | Tarion warranty required for contractor-built. Self-build requires proof of experience |
| Major Banks | Varies | Most require licensed builder, staged draws, Tarion warranty for new builds. Some may not offer self-build options. |
Provincial Regulations and Programs
- Tarion Warranty: Mandatory for most new home builds in Ontario if not self-built by the owner.
- Extended Amortization: As of August 2024, first-time buyers of new builds can access insured 30-year amortizations.
- Living Costs During Construction: Plan for alternate accommodation as you cannot occupy the property until completion and final inspection.
Government and First-Time Homebuyer Programs
- First-Time Home Buyer Incentive: Shared equity with the federal government, available for new builds and can lower monthly payments.
- Home Buyers’ Plan (HBP): Withdraw up to $35,000 from your RRSP tax-free for a down payment.
- GST/HST New Housing Rebate: Partial rebate of GST/HST paid on new or substantially renovated homes.
Rate Comparison Table (Ontario – August 2025)
| Mortgage Type | Typical Rate Range* | Down Payment Required |
|---|
| Construction Mortgage | 6.50% – 8.50% | 20–25% |
| Conventional 5-Year | 4.99% – 6.25% | 5–20% |
*Actual rates vary based on lender, credit, and project details. Construction mortgages usually carry a premium over standard rates.
Next Steps and Recommendations
- Consult Multiple Lenders: Each lender has different requirements and rates. Compare options for both builder and self-build products.
- Gather Documentation: Prepare detailed plans, permits, budget, and proof of experience (for self-builds).
- Consider Living Arrangements: Budget for alternative housing during construction.
- Get Expert Help: Construction mortgages are complex—work with a mortgage broker or lender experienced in Ontario construction financing.
For the most efficient rate comparison and to access construction loans from top Canadian lenders, start your application at theratefinder—a comprehensive platform offering a streamlined, multi-step process for residential, commercial, and construction financing. Visit theratefinder.ca/onboarding/email to begin your personalized mortgage solution.
Summary
Construction mortgages in Ontario are advanced in stages as work progresses, require larger down payments, and have stricter qualification criteria compared to traditional mortgages. Rates are higher due to increased risk, and regulatory requirements such as the Tarion warranty apply for most contractor-built homes. First-time buyers can benefit from extended amortizations and government incentives. Comparing multiple lenders and working with experts will help secure the best financing for your project.