Building a home or undertaking a major renovation is an exciting and rewarding process. However, it can also be overwhelming, especially when it comes to construction financing in Ontario, Canada. There are several options for construction mortgage financing, but it can be difficult to know where to start. In this guide, we’ll break down the basics and help you make an informed decision.
What is Construction Mortgage Financing?
Construction mortgage financing is specifically for building or renovating a home. Unlike a traditional mortgage loan, which is used to purchase an existing property, construction financing provides funds for the construction or renovation of a new property. The loan is often disbursed in stages called ‘draws’ as the work progresses, rather than in a lump sum upfront.
Types of Construction Financing in Ontario
There are a few types of construction financing available in Ontario. Here are the most common options:
Private investors or Mortgage Investment Corporations (MIC) usually provide financing for the construction of a new home or renovation of an existing one through this type of loan. Upon completion of construction, the borrower must repay the loan or convert it into a traditional mortgage.
Home equity line of credit (HELOC):
A HELOC is a revolving line of credit that can be used for a variety of purposes, including renovations and construction. This can be a good option for a borrower who already has equity in their home and wants to remodel their kitchen, bathrooms or put on an addition.
A cash-out refinance involves taking out a new mortgage that’s larger than the existing one and using the difference to finance construction or renovation. This can be a good option for borrowers who want to take advantage when interest rates are low.
Requirements to consider
To qualify for construction mortgage financing in Ontario, borrowers must meet certain requirements which may include:
A good credit score: Lenders will typically require a credit score of at least 650.
A down payment: Most lenders require a down payment of at least 35% of the total project cost and often more.
A detailed construction plan: Lenders will want to see a detailed plan that outlines the scope of the project, the timeline, and the budget. Depending on the size of the project, you may need a general contractor and a cost consultant to review the budget.
Proof of income: Borrowers will need to provide proof of income to demonstrate their ability to repay the loan. But, this varies from borrower to borrower depending on your employment situation, liquidity and collateral.
Collateral: When the margins are narrow, the lender will require additional security for the loan. Property owned by you, a relative, a partner, or a friend who believes in you are all collateral.
Benefits of Construction Financing in Ontario
Flexibility: Construction mortgage financing allows borrowers to customize their home or renovation project to their exact specifications.
Only pay on draws: Typically, interest is only paid on the portion of the loan that has been advanced. So delays in construction won’t cost you extra interest on monies you have not accessed yet.
Tax advantages: In some cases, the interest paid on a construction mortgage loan may be tax deductible. Talk to your accountant to see if this is an option for you.
Construction mortgage financing can be a great option for anyone looking to build or renovate a home in Ontario, Canada. With several types of financing available, it’s a convenient and affordable way to turn your dream home into a reality. By understanding the requirements and benefits, you can make an informed decision and enjoy a smooth, stress-free construction process.