Construction Financing
Construction Financing products are available to allow individuals to build their own home when they have purchased a lot or vacant land in their own names. The mortgage can be greater than 80% of the total value (proposed home plus land) to a maximum ratio of 95%. The borrower must have a contract with a builder or contractor who is registered under the New Home Warranty Programme to obtain a mortgage of more than 80%. No extra mortgage insurance fees above the norm are required.
There can be up to four separate draws or disbursements of mortgage funds as the construction proceeds with three being the standard. It is important to note that under the Construction Lien Act, with each draw the lender is required to hold back a minimum of 10% to 15% of the funds being released. For example, if $50,000. is authorized to be advanced, $42,500 is given to the contractor and $7,500 is held separately until 40 days after the property is 100% complete. At all times, the lender is required to keep sufficient funds back to complete the home in full as per the home specifications submitted. Funds are not released to cover the cost of the completed construction.
The advantage of this type of mortgage financing is to build the home of your dreams. The disadvantages are the potential cost overruns for improvements/ enhancements added after the plans are submitted and the expense to maintain an existing residence while paying interest on the construction mortgage being advanced. There are a select number of lenders who participate in this type of lending so be sure to ask your mortgage agent for further information to determine if this specialized lending vehicle will meet your needs.