Having a new home built makes for an exciting time in a family’s life. Instead of having to buy a house that already has a set floor plan, color scheme, flooring and other traits, you get to make all of those choices before the house even goes up. A lot of people buy an existing house knowing that they want to make a number of changes, such as repainting the master bedroom, ripping out the carpet and replacing it with hardwood floors, or even knocking out a wall or two to open up a living space. People who take out construction mortgages in BC are using the financing to have their homes built from scratch.
Construction Mortgages in BC
When you’re looking at construction financing in Victoria, Vancouver or other cities in BC, there are three different scenarios that typically surround a construction mortgage. The borrower may be purchasing a house that has just been completed; he may be hiring a general contractor to oversee the whole process; or he may be acting as the general contractor himself. If the house is already finished and the buyer is about to purchase it, then the buyer takes out a completion mortgage. If the buyer is just at the beginning of the construction process, either acting as his own general contractor or working with a contractor, he will typically use a completion mortgage, although some lenders offer progress draw mortgages in some areas.
The skinny about completion mortgages
A completion mortgage is the loan that you use when you don’t have to pay until the house is 100% complete — in other words, it’s the same as any typical mortgage. You’ll make a deposit when you offer to buy the house and then put down your down payment at the point when your financing conditions have been met. When the house is 100% complete, the mortgage kicks in for the rest of your funds. You’ll start paying principal and interest payments after you take the mortgage out — not when you decide to buy the house.
Here’s an example. You are going to buy an $800,000 house through a builder. You put down $2,000 as a deposit with your purchase offer, and then you pay $38,000 more once the financing is in place. This combined $40,000 is your effective “down payment”. Note that it’s only 5% of the purchase price — if you want to avoid private mortgage insurance, you’ll want to put 20% down — but then the mortgage kicks in when the house is ready, with the bank paying the remaining $760,000.
How do progress draw mortgages work?
Most construction mortgages in BC work as completion mortgages. However, progress draw mortgages work a little differently. In this case, the builder gets money in installments as the construction takes place. In most cases, progress draws take place when the house is 35% (roof tight), 65% (lock up, just before drywall) and 100% (ready for move-in) complete. There has to be a review of the house before each payment goes out to ensure that each stage has been met.
If you’re curious about getting a construction loan in BC, reach out to us at Amansad Financial. We can connect you with construction loan providers in your area and provide you with the best deal possible.