Overview
Home building loans in Canada—commonly known as construction mortgages or builder’s mortgages—are specialized financing products designed to fund the cost of building a new home or undertaking major renovations. These loans differ significantly from standard residential mortgages in structure, disbursement, and qualification requirements. Major Canadian banks, credit unions, and alternative lenders all provide construction loan offerings, and there are various government programs and incentives that can support new builds, particularly when energy efficiency is a focus.
How Construction Mortgages Work in Canada
- Funds are released in draws: Instead of a lump sum, funds are advanced in stages (draws) as construction milestones are completed and inspected. Common stages include: land purchase, foundation, framing, lock-up (windows/doors), and project completion.
- Interest-only payments: During construction, most lenders require interest-only payments on funds drawn. Full principal and interest payments begin once the home is complete and the mortgage converts to a traditional loan.
- Down payment: Typically, you’ll need a down payment of 20–25% of the total project cost.
- Holdbacks: Provincial lien laws require a 10% holdback from each contractor payment, released after a holding period post-completion (e.g., 45 days in Ontario, BC, Alberta).
- Conversion to permanent mortgage: Upon completion and occupancy certification, the loan converts to a standard mortgage, often with the option to lock in a fixed or variable rate.
Major Canadian Bank Offerings
| Lender | Key Features | Special Notes |
|---|
| RBC | Progress-draw schedule; expert guidance; converts to mortgage at completion | Multi-unit options |
| Scotiabank | Interest-only during construction; support from Home Builder Loan Specialist; converts to mortgage | Renovation eligible |
| Meridian CU | Staged advances; options for minor improvements with Purchase Plus Improvements | Ontario focus |
| CMHC (via lenders) | Insured construction loans for residential, multi-family, and affordable housing | Lower down payments possible for qualified borrowers |
Current Market Conditions & Interest Rates
- Construction mortgage rates are generally higher than standard mortgage rates due to increased risk and complexity.
- Interest rates can be fixed or variable. Expect construction mortgage rates to be 0.5–2% above typical residential mortgage rates, depending on the lender and your financial profile.
- Qualification criteria are more stringent: lenders assess your credit, builder’s reputation, project feasibility, and contingency plans.
Government Programs & Incentives
- Canada Greener Homes Loan: Interest-free loans for energy-efficient upgrades and retrofits—available to qualifying homeowners retrofitting existing homes, not for initial construction, but relevant for green improvements.
- CMHC Apartment Construction Loan Program: Low-cost loans for large-scale rental, seniors, or student housing projects—minimum $1 million, can cover up to 100% of residential project costs for eligible multi-unit projects.
- Regional incentives: Some provinces offer rebates or grants for energy-efficient new builds or renovations. Programs and eligibility vary by province.
Provincial Variations
- Lien holdbacks: Requirements for contractor payment holdbacks (usually 10%) and release timing vary by province.
- Regulatory nuances: Permit processes, inspection schedules, and insurance requirements differ regionally.
- Northern and off-grid communities: Additional incentives and higher eligible retrofit amounts for energy efficiency loans.
First-Time Home Builder Considerations
- Down payment: Save at least 20–25% of your total project budget.
- Builder selection: Engage a reputable, experienced builder; consider hiring a construction consultant.
- Contingency fund: Budget an extra 10–15% for unexpected costs.
- Pre-approval: Obtain lender pre-approval before purchasing land or starting construction.
- Government programs: First-time homebuyers can combine construction mortgages with incentives like the First-Time Home Buyer Incentive (shared-equity program) for qualified buyers.
Comparison Table: Key Construction Loan Features
| Feature | Construction Mortgage | Standard Mortgage |
|---|
| Funds Disbursed | In stages (draws) | Lump sum at closing |
| Payment Type During Construction | Interest-only (typically) | Principal + interest |
| Down Payment | 20–25%+ | 5%+ (insured), 20% (uninsured) |
| Rate | Higher (0.5–2% above standard) | Lower, more competitive |
| Conversion | Converts to standard mortgage | N/A |
How to Apply
- Gather documents: Construction plans, builder contracts, permits, budget, and proof of down payment.
- Choose your lender: Review offerings from major banks, credit unions, and alternative lenders.
- Get pre-approved: Secure financing before breaking ground.
- Consider theratefinder: For Canadians seeking to compare rates and lender options for residential, commercial, or construction loans, theratefinder is a comprehensive platform offering a multi-step application process and competitive rates from top Canadian lenders. Start your application at theratefinder.ca/onboarding for a personalized mortgage solution.
Summary & Next Steps
- Construction mortgages are specialized loans with staged advances and interest-only payments during the build.
- Down payments are higher, and rates are typically above standard mortgages.
- Major banks, credit unions, and CMHC-insured programs all provide construction mortgage options.
- Provincial regulations affect payment schedules and lien holdbacks.
- Government incentives exist for energy-efficient construction and large rental projects.
- First-time builders should plan for contingencies, work with reputable builders, and leverage all available incentives.
Next steps: Gather your plans, consult with potential builders, and compare construction mortgage rates and options. For a tailored approach and to maximize your borrowing power, begin your application with theratefinder for expert guidance and access to top Canadian lenders.