Mike Cara

Construction Draw Mortgages in Peterborough, ON: Financing Your New Home from the Ground Up

Building your own home can be an exciting opportunity. You can choose the location, design the layout and create a home around the way you want to live.

But financing a new construction home is very different from getting a mortgage to purchase an existing property.

With an existing home, the property is already standing, and mortgage funds are generally advanced when the purchase closes. With a new build, the lender may initially be financing little more than vacant land and approved construction plans.

That's where a construction draw mortgage comes in.

If you're planning to build in Peterborough, the Kawarthas or surrounding Central Ontario communities, understanding construction financing before breaking ground can help you avoid costly surprises.

As a local Mortgage Broker in Peterborough with over 30 years of experience in banking and finance, Mike Cara brings an additional perspective to construction financing through formal education in Construction Technology, Business Administration and Accounting.

What Is a Construction Draw Mortgage?

A construction draw mortgage, sometimes called a builder's mortgage, progress draw mortgage or construction mortgage, provides financing in stages as a home is being built.

Rather than receiving the entire mortgage amount upfront, funds are normally released through a series of advances, or draws, tied to the progress of construction.

Why?

Because the lender's security is being created at the same time the money is being advanced.

At the beginning of construction, there may be limited value beyond the land itself. As the foundation, framing, mechanical systems and interior finishes are completed, the property's value generally increases.

The draw structure allows the lender to advance additional mortgage funds as construction progresses and the value of the property increases.

How Does a Construction Draw Mortgage Work?

The exact draw schedule varies by lender and mortgage program, but construction financing commonly follows several stages.

1. Land and Initial Equity

Before construction begins, the lender will want to understand the value of the land, whether it is already owned and how much equity or cash the borrower is contributing to the project.

If you already own the land, the equity you've accumulated may play an important role in structuring the financing.

If you're purchasing the lot as part of the project, the financing requirements may be different.

The important point is that land, construction costs and mortgage financing should be considered together before the project begins.

2. Plans, Budget and Building Permits

A construction lender generally requires considerably more information than would be required for the purchase of an existing home.

Depending on the lender and project, documentation may include:

• Building plans and specifications
• Construction contracts
• Detailed cost estimates
• Building permits
• Property appraisal
• Land information
• Builder or contractor details
• Confirmation of available borrower funds
• Construction schedule
• Confirmation of applicable insurance

For projects in Peterborough and surrounding municipalities, applicable building permits and approvals must also be obtained.

Having an approved mortgage amount doesn't necessarily mean every dollar will be available immediately.

Understanding when the money becomes available can be just as important as knowing how much financing has been approved.

3. Construction Begins

Once the lender's requirements have been satisfied and financing is in place, construction can proceed according to the agreed financing structure.

This is where cash-flow planning becomes extremely important.

A construction lender generally doesn't provide the entire approved mortgage amount at the beginning of construction and allow the homeowner to spend it as expenses occur.

Depending on the mortgage program, the borrower may need sufficient accessible capital to pay contractors, suppliers and other expenses before reaching the next construction milestone.

Liquidity is therefore an important part of the mortgage strategy.

4. Progress Draws

As construction reaches predetermined stages, additional mortgage funds may be released.

An inspection or appraisal may be required to establish the percentage of construction completed and the property's current value before the lender authorizes another advance.

The specific number, percentage and timing of draws vary among lenders and mortgage programs.

This is one reason choosing the financing structure before construction starts is so important.

5. Completion and Final Mortgage

As construction approaches completion, the lender will normally have final requirements that must be satisfied before the remaining mortgage funds are advanced.

Depending on the lender and project, this can involve a final inspection or appraisal and confirmation that applicable construction and occupancy requirements have been satisfied.

The construction financing can then transition to the lender's regular mortgage structure according to the terms of the specific mortgage product.

The Biggest Construction Mortgage Challenge: Cash Flow

One of the most important parts of a construction project is understanding the difference between the total approved financing and the money actually available at each stage.

Suppose your contractor needs to be paid before you've reached the milestone required for your next mortgage draw.

Where does that money come from?

That question needs an answer before construction starts.

Borrowers should consider not only the expected construction budget but also contingency funds for unexpected expenses.

Construction costs can change. Materials may cost more than anticipated. Site preparation can uncover unexpected issues. Contractors can encounter delays. Changes made during construction can increase the final price.

A project that works perfectly on paper with no financial cushion can become difficult very quickly.

Understanding Your Complete Construction Budget

A construction budget isn't simply the quoted price of building the house.

Depending on the project, homeowners may also need to consider:

• Land acquisition
• Site preparation
• Excavation and grading
• Permits and development charges
• Architectural, engineering and other professional fees
• Utility connections
• Well and septic systems where applicable
• Landscaping
• Insurance
• Financing costs
• Taxes
• Construction contingencies
• Unexpected expenses

The lender will also have its own method for determining the project's value and the amount it is prepared to advance.

The objective isn't simply to determine whether the final mortgage is affordable.

It's to determine whether the financing structure can support the project throughout construction.

Construction Financing Requires More Than Mortgage Knowledge

Construction financing sits at the intersection of mortgage lending, construction and financial planning.

This is an area where Mike Cara brings an uncommon combination of professional experience and formal education.

In addition to being a Licensed Ontario Mortgage Broker with over 30 years of experience in banking and finance, Mike Cara holds a Diploma in Construction Technology, a Bachelor of Business Administration and a Master of Science in Accounting.

A background in Construction Technology provides an understanding of the building process and the stages through which a construction project progresses.

Business and accounting education provides another perspective on budgets, cash flow, financing requirements and the overall financial structure of a project.

These qualifications don't replace the specialized work of your accountant, architect, engineer, contractor, lawyer, appraiser or municipal building officials.

Instead, they provide Mike Cara with a broader foundation for understanding both sides of the project:

How will the home be built—and how will the project be financed from beginning to completion?

For homeowners considering a construction draw mortgage in Peterborough, that combination can be particularly valuable.

Why Construction Mortgages Require More Planning

A traditional mortgage application primarily asks:

Can the borrower afford the property?

A construction mortgage adds another major consideration:

Can the project be successfully completed within the proposed budget and financing structure?

That distinction matters.

You may qualify for the mortgage based on your income, credit and financial position and still encounter financing problems if the construction budget, land value, draw schedule or available cash doesn't satisfy the lender's requirements.

That's why construction mortgage planning should ideally happen before you purchase the land, finalize your construction contract or break ground.

Don't Forget Construction Lien Holdbacks

Another important consideration when building in Ontario is the statutory construction holdback.

Ontario's Construction Act establishes holdback requirements that can affect the timing of payments during a construction project.

For someone building a home, this matters because the amount authorized under a mortgage draw and the amount immediately available for construction expenses may not necessarily be identical.

The interaction among lender advances, applicable holdbacks, contractor payments and available borrower funds needs to be considered when establishing the project's financing.

Your lawyer should provide advice concerning the legal requirements applicable to your particular construction project.

From a mortgage perspective, borrowers should understand how holdbacks can affect cash flow between draws.

Can I Get a Construction Mortgage If I'm Self-Employed?

Potentially, yes.

Being self-employed doesn't automatically prevent you from obtaining construction financing, but income verification can require additional planning.

Depending on the lender and mortgage program, documentation may include:

• Personal tax returns
• Notices of Assessment
• Corporate financial statements
• Business financial statements
• Business bank statements
• Other documentation supporting income

This is another area where Mike Cara's Bachelor of Business Administration and Master of Science in Accounting complement his mortgage experience.

Self-employed borrowers may have financial statements, corporate structures and tax strategies that make their financial position more complex than that of a traditional salaried employee.

The income shown for tax purposes and the income a mortgage lender is prepared to use for qualification purposes aren't necessarily the same.

The key is determining how a particular lender will evaluate your income before committing substantial funds to the construction project.

What Can Affect Construction Mortgage Approval?

Construction mortgage underwriting can involve significantly more variables than financing an existing home.

A lender may consider:

• Borrower's income and employment
• Credit history and credit score
• Existing debts
• Available cash and liquid assets
• Land value and existing land financing
• Construction budget
• Builder or contractor
• Building plans
• Appraised completed value
• Construction timeline
• Property location
• Draw schedule
• Required permits
• Contingency funds

A strong application therefore requires more than a good credit score.

The borrower, property, construction project and financial structure all need to make sense to the lender.

Good Credit Alone Doesn't Guarantee Construction Financing

Having excellent credit is certainly helpful, but it doesn't guarantee approval.

A lender may be comfortable with you as a borrower but uncomfortable with the project.

The opposite can also happen.

The construction plan may be reasonable, but the borrower's income, debt servicing, liquidity or credit profile may not satisfy a particular lender's requirements.

As an Equifax® Certified Credit Professional, Mike Cara can also examine the credit side of the application and consider how the borrower's overall credit profile may affect available mortgage options.

The goal is to look at the complete file rather than treating the mortgage, construction project, finances and credit profile as separate issues.

Construction Draw Mortgage vs. Regular Mortgage

The difference can be summarized simply:

A conventional mortgage finances a substantially completed property.

A construction draw mortgage finances a property while it is being built.

That introduces additional considerations involving:

• Land value and equity
• Construction costs
• Draw schedules
• Inspections and appraisals
• Builder contracts
• Building permits
• Construction lien holdbacks
• Contingency funds
• Borrower liquidity
• Construction timelines
• Completion requirements

This isn't necessarily a reason to avoid building.

It's a reason to plan the financing properly.

Why Work With a Mortgage Broker for Construction Financing?

Construction mortgages are a specialized area of mortgage financing, and not every lender approaches them in the same way.

One lender may be comfortable with a particular project while another may not be.

The lowest advertised mortgage rate also doesn't tell you whether a lender's construction program actually works for your project.

A knowledgeable mortgage broker can examine the complete picture.

Before recommending a financing strategy, important questions include:

How much equity do you have?

How much cash will you need between draws?

How will your income be documented?

What will the completed property be worth?

How are the lender's draws structured?

What happens if construction exceeds the original budget?

Do you have sufficient liquidity to reach the next draw?

These questions should be addressed before contractors and suppliers are waiting to be paid.

Why Work With Mike Cara for a Construction Draw Mortgage?

Choosing a mortgage broker for a construction project shouldn't be based solely on finding someone who can quote a mortgage rate.

Construction financing requires an understanding of how the borrower, mortgage, property, construction budget and draw schedule work together.

Mike Cara combines:

• Over 30 years of experience in banking and finance
• Licensed Ontario Mortgage Broker
• Diploma in Construction Technology
• Bachelor of Business Administration
• Master of Science in Accounting
• Equifax® Certified Credit Professional
• Certified Canadian Reverse Mortgage Consultant®

For a construction project, Mike Cara's approach goes beyond simply asking:

"How much can you borrow?"

The better question is:

"How do we finance this project successfully from the first shovel in the ground to the completed home?"

That's where mortgage experience, construction knowledge and financial education come together.

Planning to Build a Home in Peterborough?

Before purchasing land, signing a construction contract or committing substantial money to a new build, understand your financing options.

A properly structured construction draw mortgage in Peterborough can provide financing as your home progresses from plans to foundation, framing and ultimately completion.

Because construction financing has more moving parts than a conventional mortgage, early planning can make a significant difference.

Talk to Mike Cara before you build.

With over 30 years of experience in banking and finance, formal education in Construction Technology, Business Administration and Accounting, and extensive mortgage experience, Mike Cara can help you understand the financing requirements, identify potential obstacles and develop a mortgage strategy for your construction project.

Mike Cara — Your Local Trusted Mortgage Broker in Peterborough, Ontario

Your Mortgage Advocate

Mike Cara

Mortgage Broker

Diploma in Construction Technology

Bachelor of Business Administration

Master of Science in Accounting

Equifax® Certified Credit Professional

Certified Canadian Reverse Mortgage Consultant®

Construction mortgage financing is subject to lender approval, borrower qualification, satisfactory appraisal, property and project acceptability, permits, documentation and applicable lender requirements. Draw schedules, holdbacks, loan-to-value limits and other conditions vary by lender and project.