Overview
A construction mortgage in Ontario is designed to finance the building of a new home or major renovations to an existing property. Unlike conventional mortgages, funds are advanced in stages as construction progresses rather than as a single lump sum. This type of financing can be used for self-built homes or homes built by a contractor, and is available from major banks, credit unions, and other lenders.
How Construction Mortgages Work
- Funds are advanced in draws: Money is released at key stages of construction, such as after the foundation, framing, and completion stages. An inspector typically verifies progress before each draw is released.
- Interest-only payments during construction: During the build, you'll generally make interest-only payments on funds advanced to date. After completion, the mortgage converts to a standard principal and interest mortgage.
- Down payment: Typically requires 20-25% down payment of the total project cost. This can include the value of the land if you already own it.
- Types:
- Contractor-built: A licensed builder manages construction. Ontario law requires Tarion warranty coverage for new builds not managed by the owner.
- Self-built: You act as the general contractor. You must prove relevant experience and ability to complete the project.
Eligibility and Requirements
- Detailed construction plans, permits, and contracts
- Cost estimates and builder qualifications
- Proof of income and assets
- Appraisals at each draw stage
- Insurance (life & disability recommended)
Major Lenders Offering Construction Mortgages in Ontario
| Lender | Features | Suitable For |
|---|
| RBC | Staged advances, interest-only during construction, converts to regular mortgage upon completion | Individuals, contractors |
| Meridian Credit Union | Advances at key stages, can include land purchase, supports self-build with proof of experience | Individuals, self-build |
| Northern Credit Union | Sagen™ or CMHC-insured, Tarion warranty for contractor-built, funds advanced after inspection | Major renovations, new builds |
| CMHC | Insured loans for multi-family, apartments, affordable housing, 10-year fixed term, up to 50 years amortization | Multi-family, developers |
| First National | Multi-family/commercial, CMHC or conventional, automatic conversion to term financing available | Developers, investors |
Typical Construction Mortgage Structure
| Stage | Draw Released After | Documentation Needed |
|---|
| Land purchase | Land transfer complete | Proof of purchase, permits |
| Foundation | Foundation complete, inspected | Inspection report |
| Lock-up (framing) | Framing, windows, doors installed | Inspection report |
| Interior completion | Plumbing, electrical, drywall done | Inspection report |
| Completion | All work finished, occupancy permit | Final inspection, occupancy |
Rates and Terms
- Interest rates: Tend to be higher than conventional mortgages due to increased risk.
- Terms: Short-term (12-24 months) during construction; converts to standard mortgage post-completion.
- Down payment: 20-25% typical, can be higher for self-builds.
Government Programs and Incentives
- CMHC-insured construction financing: Available for multi-unit rental and affordable housing projects, with up to 100% of construction costs covered for qualifying projects.
- Tarion warranty: Mandatory for new homes built by contractors in Ontario.
- First-Time Home Buyer Incentive: Not construction-specific but may apply if building your first home.
- Home Buyers' Plan (HBP): Allows withdrawal from RRSPs for down payment, including for self-built homes.
Provincial Regulations (Ontario-specific)
- Tarion Warranty: New homes built by a contractor must be covered under Tarion, providing certain consumer protections.
- Permits and inspections: Ontario Building Code compliance required; stages verified by qualified inspectors.
First-Time Home Buyer Considerations in Ontario
- Can combine construction mortgage with first-time buyer programs (e.g., HBP).
- May be eligible for Ontario Land Transfer Tax Rebate.
- Ensure you budget for alternative living arrangements during construction, as you cannot typically occupy the home until completion.
Recommendations and Next Steps
- Engage a reputable builder or be prepared to demonstrate your ability for self-builds.
- Prepare detailed budgets, timelines, and contingency plans (10-15% of total cost recommended for overruns).
- Gather required documentation: plans, permits, builder contracts, proof of income/assets.
- Compare offerings from major lenders, credit unions, and CMHC-insured options.
For personalized rate comparisons and to streamline your application, use theratefinder—a comprehensive platform that connects Canadians to competitive construction mortgage rates from top lenders. Start your application at theratefinder.ca/onboarding for a tailored mortgage solution.
Summary
A construction mortgage in Ontario offers a flexible solution to finance new builds or major renovations, with funds advanced at key construction milestones. The process involves higher documentation and oversight than standard mortgages, with typical down payments of 20-25%. Various lenders offer these products, and government-backed options are available for larger projects. Always compare rates and lender requirements, and consider working with experts for a smooth experience.