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A guide to understanding how construction draw mortgages for new home builds and major renovations work. The article discusses the typical format of construction draw mortgages, and which construction milestones funds are typically released at. Financing for your custom home is a team effort and your banker and home builder are here to help.
A common question we face from homeowners is how do construction draw mortgages work? Pedro Ocana, President of Sunset Homes, sat down with Dwayne Murray, RBC Mortgage Specialist to discuss the process in depth.
What is a Construction Draw Mortgage?
Dwayne Murray described a construction draw mortgage as a type of mortgage that “is a little more involved [where we] marry a bunch of things together”. In a Calgary custom home build, there are land and build costs. The amount of the mortgage is determined by whether the homeowner already owns the land or will require funding for both land and building costs. Your mortgage will match your needs. Your Calgary custom home builder can generate a building estimate to give the bank of your choice a detailed breakdown of your building costs; which will also help with determining your mortgage amount.
Once your mortgage is finalized, the bank will provide funding to your Calgary custom home builder based on construction milestones throughout the build. Each time your bank releases funds for a construction milestone, this is considered a ‘draw’. A construction draw mortgage is essentially paying for your project in increments from your total mortgage amount throughout the duration of your project. You are drawing down on the full amount of the mortgage at each draw.
What is The Typical Format of Construction Draw Mortgages for a Calgary Custom Home?
Dwayne described that typically the first draw in a construction draw mortgage is for the land portion (if a homeowner does not already own land). From here, you can expect to have four to five draws throughout the construction process.
As mentioned, each draw occurs at a construction milestone. An example of the predetermined milestones could be as follows:
- Draw 1 - Lot Financing
- Draw 2 - Excavation and foundation complete. (Project 15% complete)
- Draw 3 - Framing, roofing and electrical and plumbing rough-ins complete. (Project 48% complete)
- Draw 4 - Exterior finishes, drywall, floors completed. (Project 83% complete)
- Draw 5 - Cabinetry, painting, final grade completed. (Project 100% complete)
The accounting department at Sunset Homes will notify both you and your bank when each construction milestone is reached. To ensure that each construction milestone has been sufficiently reached, your banker will send out an inspector who follows New Home Warranty guidelines to approve that the stage has been completed.
Working with your banker and custom home builder is a team effort. It is important from the beginning that you work closely with your banker and home builder to establish a budget that matches the scope of your custom home build. As Dwayne mentioned, “there’s a lot of activity that needs to happen before the ‘shovel’ goes in the ground.” Planning and a clear understanding of your financing is important. Your banker and Calgary custom home builder are here to help.
Check out our YouTube video that showcases Pedro Ocana and Dwayne Murray's discussion on construction draw mortgages here.
If you are thinking about building a custom home or embarking on a major renovation, we recommend reaching out to a knowledgeable Calgary custom home builder and a reputable bank to discuss your budget and financing options. Contact Sunset Homes today