Construction Mortgages - Completion
There are two categories when comes to Construction mortgages. Completion and Progress Draw mortgage. Completion mortgage is offered when the builder agrees to complete the new built home before they request for the full mortgage funds. Most banks will secure mortgage applicant's mortgage approval for up to a year with a higher interest rate. In other words, the mortgage approval and rate is valid for 1 year to give builders time to complete the project. In the case if the builder were to delay and complete after the one year, applicants will need to reapply for a mortgage approval.
Construction Mortgages - Progress Draw
A Construction Draw mortgage is requested by builders who requires portion of the mortgage funds during construction. The funds are requested in 4 to 5 segments. For example, the bank will release a portion of the approved mortgage funds when the building reaches 44% complete (lockup/airtight) stage. The next stage the bank will release funds will be approximately 65% complete (rough-in). next two stages would be 85% complete (Drywall/ Cabinets installed) and last draw is at completion at 100%. Note that different banks and construction lenders have slightly different draw schedules. Most banks will charge interest only payment on the drawn down amount of the mortgage. Also keep in mind that when the first draw is funded by the bank, the mortgage applicant fully acquires the lot and construction of the house.
Example: Progress Advance Calculation
Knowing the nature of the cash flow is crucial when building a house as it could get costly if one were to experience a shortfall in funding.