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Embarking on a construction project in Ontario can be an exciting experience, whether building your dream home or developing properties. The agents at Sunlite Mortgage have been helping borrowers navigate the intricacies of securing construction mortgages for over 25 years. In this guide, we’ll explore everything you need to know about construction mortgages in Ontario, from what you need to know about construction mortgages to understanding what a commercial mortgage is, getting a construction mortgage in Ontario, why you should contact a Sunlite Mortgage commercial mortgage broker, and understanding the process to qualify for financing and managing the construction draws.
What is a Construction Mortgage?
A construction mortgage, also known as a draw mortgage, is a specialized loan designed to fund the construction of a new property. Unlike traditional mortgages, which disburse funds upfront, construction mortgages release funds in stages, or draws, as construction progresses.
Getting a Construction Mortgage in Ontario
You’ll need to follow a structured process to obtain a construction mortgage in Ontario. This process typically involves creating detailed construction plans and budgets, purchasing land or securing infill properties, and working with a bank or mortgage broker to qualify for financing.
Construction Plans and Creating a Budget
Developing comprehensive construction plans and budgets is essential for securing a construction mortgage. Lenders will require detailed plans outlining the scope of work, materials, and labour costs. A well-defined budget increases the likelihood of loan approval and ensures that funds are allocated efficiently throughout the project.
Buying the Land or Doing an Infill
Before construction can begin, you’ll need to acquire land or identify suitable infill properties. Whether purchasing vacant land or repurposing existing lots, conducting due diligence on zoning regulations, utilities, and accessibility is crucial for a successful project.
Contacting a Sunlite Mortgage Commercial Mortgage Broker
Once your construction plans are in place, it’s time to contact a Sunlite Mortgage commercial mortgage broker specializing in construction financing to help you with your financial needs. We will guide you through the loan application process, assess your financial eligibility, and help you secure the best possible terms for your construction mortgage.
Qualifying for Construction Financing
Qualifying for construction financing in Ontario requires meeting stringent eligibility criteria set by lenders. Income stability, creditworthiness, and project feasibility will influence loan approval. Working closely with your Sunlite Mortgage commercial mortgage broker to provide the necessary documentation and demonstrate project viability is essential for a successful application.
Soft Cost and Hard Cost
Construction financing covers soft costs, such as architectural fees and permits, and hard costs, including materials and labour. Understanding the breakdown of soft and hard costs is essential for creating an accurate budget and ensuring all expenses for the build are accounted for during construction.
Getting an Appraisal and Environmental Test
Before approving a construction mortgage, lenders will conduct appraisals and environmental tests to assess the property’s value and identify potential risks. These evaluations help mitigate lender risk and ensure the property meets environmental standards.
Construction Draws and Disbursement
Construction draws are critical milestones in the construction process, during which funds are released to cover project expenses. The number of construction draws and disbursement stages varies depending on the lender and project scope. Typically, draws are tied to specific construction milestones, such as foundation completion or framing.
Loan Amount and Down Payments
Construction mortgages typically cover a percentage of the total project cost, with borrowers required to provide a down payment to secure financing. The loan amount and down payment percentages vary depending on project complexity, borrower creditworthiness, and lender requirements.
Interest Payments
During the construction phase, borrowers are responsible for making interest payments on the outstanding loan balance. These payments are typically interest-only and accrue based on the funds disbursed for construction draws.
Construction Liens and Holdback
Construction liens and holdbacks protect contractors and suppliers by ensuring service payment. As a borrower, understanding lien laws and holdback requirements is essential for mitigating risk and avoiding legal issues during construction.
What Happens on Completion
Upon completion of the construction project, borrowers have several options. They can refinance the construction mortgage into a conventional mortgage, pay off the loan in full, or pursue a take-out mortgage to secure long-term financing for the property.
Take-Out Mortgage
A take-out mortgage replaces the construction mortgage with a long-term financing solution, typically a conventional mortgage. Take-out mortgages offer stability and predictability, allowing borrowers to enjoy their completed property without the stress of ongoing construction financing.
Navigating the complexities of construction mortgages in Ontario requires careful planning, diligence, and expert guidance. By understanding the process, qualifying for financing, and effectively managing construction draws, borrowers can embark on successful construction projects and realize their visions. With the help of a Sunlite Mortgage commercial mortgage broker who provides the proper knowledge and support, securing a construction mortgage can be the first step towards building the home of your dreams or realizing your development ambitions in Ontario.
