Construction Mortgage


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Two Types of Construction Mortgage

Like many would be homeowners you may wish to construct a home rather than buying an existing home. This is a popular choice as it allows you to customize the living space to suit your individual lifestyle.

There are two types of construction mortgages from which you can choose, the Completion Mortgage or the Process and Draw Mortgage. Some lenders also allow a combination of the two.

Approach your Mississauga mortgage broker in the early planning stage of your construction to get a clear idea of the size of the loan that for which you will qualify. You can apply for a pre-approved mortgage for the construction project using the lot and any other fixed property that you may have as collateral.

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Process and Draw Mortgage Explained

The Process and Draw Mortgage pays out funds in phases over the duration of the construction process. The money is usually paid in four stages with the last amount paid on completion. Inspections will take place after each of the phases before the lender will pay the construction company.

This is a good option if you are building your own home and require incremental inflows of funds. Whilst the advantages of this type of mortgage are obvious, there are also disadvantages.

  • You will have to pay for four appraisals.
  • You start to will pay interest as soon as the first payment is made, long before you have taken occupation of the premises.
  • You will not be permitted to change this mortgage agreement after the initial payment is made.
  • If the equity on the lot and other real estate does not cover the required loan you may have to finance the first phase yourself.

Completion Mortgage Explained

The Completion Mortgage only pays out once the construction has been completed. This type of mortgage is initiated by contract, normally with a small down payment. You may be permitted to pay the down payment in instalments.

Because it pays out on completion, you will be permitted to make changes to the contract up to thirty days before completion. This could come in handy because you may want to make changes to the plans that may require additional funding.

The danger of the completion mortgage is that things can change over time and something like a loss of income can result in the mortgage agreement being withdrawn. On the positive side lenders normally push builders to complete the work within one hundred and twenty days, and this type of mortgage is easier to obtain than the Process and Draw Mortgage as it carries less risk.

Financing your Mississauga Construction over the Longer Term

Construction Mortgages can be converted to a regular long-term mortgage after the construction is complete or the original contract may combine the two in a Construction to Permanent Loan. The latter ensures that you have only one closing cost.

Obtaining a mortgage for your Mississauga construction project can be trickier than for an existing home. Normally the completion mortgage is the easier route to go because the lenders have less risk since payment is only made once construction is complete.

If you are applying for a Process and Draw Mortgage you may have time restrictions placed on the project and you may not be free to choose your own builder.

Your Mortgage Broker in Mississauga will ensure that your mortgage application is smoothly and efficiently accomplished so that you get the mortgage that best suits your needs and that springs no nasty surprises.

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