The year 2025 is an exciting time within the Canadian construction industry. Even with the uncertainty associated with American tariff policy, technological advancement, demographic changes, and policy shifts have made construction an intriguing sector.
One innovation is IPD, or Integrated Project Delivery. This model pushes for collaboration among owners, architects and contractors for the purpose of reducing delivery times and improving reliability of cost estimates. As firms work together to share risk, they also reap common rewards. This change is going to become more common in Canadian construction and will lead to greater efficiency, giving room for even more innovation.
Obviously, one important factor in the construction industry is access to financing. Finding credit for commercial real estate purchases is also an important question for investors to answer. Securing commercial mortgage loans and construction mortgage loans is as important a part of the process as ever. Read on to see how trends are impacting financing in these areas.
How Rising Interest Rates Are Impacting Commercial Mortgages
While commercial mortgage loans may see a decrease in interest rates over the coming 18 months, the increase in rates over the past quarters has impacted the industry in several ways:
- Increased borrowing costs. When you have higher interest rates, you’re going to pay more in debt service. Over time, that could eat into profit margins unless you can find ways to generate more revenue from the project. Depending on the amortization period of the loan, this can add a significant percentage to the overall cost.
- Increased risks at refinancing. Because interest rates are climbing, many commercial mortgage loans will undergo refinancing at higher rates than their original issue. If the borrower cannot find a commercial loan at a comparable rate to their prior loan, the costs of the project could increase to the point of threatening the viability of the project.
- Decreased real estate activity. When costs of doing business go up, then demand can decrease. Because borrowing will become more expensive as a result of higher interest rates, there may be fewer entities that have the means to undertake projects, which can mean a lower level of economic activity.
- Increased risks for lenders. Yes, higher interest rates mean more income for lenders. However, they also mean higher risk. Forcing borrowers to face higher expenses for taking out debt means taking on a greater risk of default as borrowers will have a higher bar to meet as far as paying back loans.
- Increased reliance on loans with shorter terms. When borrowers don’t like the terms they’re offered, they will ask for shorter loan terms, hoping that rates will sink back down to a more manageable level by the time the loan matures. This will reduce the likelihood that they would face early prepayment penalties by refinancing before the end of the loan. However, that can actually backfire if interest rates keep going up instead of dropping.
- Elevated risk for particular sectors. All commercial properties find themselves vulnerable in an environment with higher interest rates. However, in the case of construction mortgages, as well as office projects and other forms of development, the increase in costs for everything from raw materials to labor could make these projects even riskier – which could lead to a vicious cycle in terms of risk and higher interest rates.
Construction Loans vs. Traditional Home Loans: What’s the Difference?
If you’re building your own home or purchasing one from a custom builder, you may have to take out one of the construction mortgage loans that many Canadian lenders mandate. These work significantly differently from traditional home mortgages.
Construction mortgages, also known as builder’s mortgages, are used to pay for a home purchase for a property that is not in place yet. Much like a traditional home loan, construction mortgage loans require down payments and offer variable or fixed-rate options. In some instances, your construction loan will switch over to a traditional note once the building is finished and you’ve received a certificate of occupancy.
The primary difference between a traditional home mortgage and a construction mortgage involves the distribution of money. A traditional loan comes as a lump sum paid at closing. Construction mortgages are distributed in draws, or smaller amounts, at the completion of each phase. When construction mortgage loans are in the draw phase, some lenders may only charge interest on the actual amount that you have borrowed to that point. After completion of construction, you will have to start paying principal as well as interest.
Another cost associated with construction mortgages is that inspections are mandatory at every step before approval of the next draw. Some banks may take the inspection and progress fees out of each draw, while others may leave the borrower to pay those fees directly.
Construction mortgage loans come with greater risk and so the approval process can be more rigorous. Traditional loans require that borrowers pass muster in terms of credit score, employment history and income reliability. With construction mortgage Canada lenders generally require assurance of completion within a specific time frame. Builders have to have licenses and have a track record of quality completion. In some cases, a larger down payment, as large as 30 per cent, might be required to gain approval.
The Growth of Sustainable and Green Construction Financing
The Canadian federal government has spent almost three years tweaking its Canada Green Buildings Strategy, which is a program designed to cut greenhouse gas emissions to net zero in the “built environment” by 2050. That environment consists of the (as of today) 16 million homes and almost half a million buildings where people both work and live. At the present time, the construction industry is third in the nation in heavy pollution, only behind oil and gas development and transportation, after you factor in emissions from HVAC systems powered by oil and gas. If you add in the carbon dioxide emitted through the manufacture of construction materials (primarily steel and concrete) then the construction industry contributes almost 30 per cent of the nation’s carbon emissions.
The solutions in Ottawa’s plan include green jobs, green skill sets, a sustainable electricity grid free of emissions, and other low-carbon technologies. The first major goal is a 37 per cent decrease in direct emissions from institutional, residential and commercial buildings from the levels in 2005 by 2030. All of this will take money – which means a need for access to funding.
The Canadian government has instituted a number of different initiatives to help a variety of projects. Here are some of the largest programs:
- Buildings Retrofits Initiative. Available to residential, institutional and commercial builders, this initiative finances decarbonization retrofit projects and energy efficiency renovations in existing construction.
- Canada Greener Homes Grant. Available only to residential borrowers, this provides funding to retrofit everything from doors and windows to home insulation and renewable energy systems.
- Canada Greener Homes Loan. Similar to the grant mentioned above, this provides financing instead of direct payments.
- Codes Acceleration Fund. This fund assists residential, commercial and institutional projects in paying for the changes needed to attain compliance with building codes.
- Community Buildings Retrofit Initiative. This also helps with retrofitting to make buildings sustainable, focusing on local governments and NGOss in changing public buildings to boost energy performance while reducing maintenance and operating costs as well as greenhouse gas emissions.
- Deep Retrofit Accelerator Initiative. Available to residential, institutional and commercial borrowers, this fund helps with deep retrofits in mid- or high-rise multi-unit residential buildings as well as commercial and institutional buildings. It can also fund more macro-level market transformation within a particular market segment or region.
- Financial Assistance for ISO 50001 in Commercial and Institutional Buildings. This program helps borrowers meet the ISO 50001 Energy Management Systems standard.
- Low Carbon Economy Fund. This funds projects to decrease greenhouse gas emissions while also making communities more resilient and is available to residential, institutional and commercial entities.
- Union Training and Innovation Program. This fund pays for apprenticeship training in skilled trades that will apply in green and sustainable construction through support of the Canadian Apprenticeship Strategy.
There are also regional and provincial agencies at work investing in low-carbon construction. One example is The Atmospheric Fund, a regional climate agency focusing on the Greater Toronto and Hamilton Area. This fund works with public, private and not-for-profit sector stakeholders to reduce carbon emissions, and it provides grants and investments into concepts that they think are valid. This fund is one of several in the Low Carbon Cities Canada network of funds.
Amansad Financial does not directly assist in the Construction Mortgage Lending Space, but may be able to point you in the right direction. If Construction Financing is unavailable, unrelated real estate security can be leveraged to provide capital for a Construction Project on a different property.