Construction Financing in Ontario
A construction mortgage funds a build in stages — called draws — rather than releasing all funds at once. Each draw corresponds to a phase of construction: site preparation, foundation, framing, lock-up, drywall, and completion. The lender advances money as the project progresses, with the property under construction serving as security.
The fundamental challenge with conventional construction financing is the process between draws. Banks require inspections, cost certificates, statutory declarations, and lien searches before each advance. A builder ready to move from framing to mechanicals can wait three to four weeks for funds to clear. On a tight build schedule, that’s the difference between completing on time and running over budget.
Private construction financing solves this. Paul places construction loans with private lenders who understand that builders need capital to flow with the work — not around a bureaucratic schedule.
Private Construction Financing vs. Bank Construction Mortgages
| Feature | Bank / Institutional | Private Lender |
|---|---|---|
| Draw schedule | Fixed — tied to inspector visits | Flexible — milestone or on-request |
| Inspector requirement | Mandatory each draw | Less rigorous / not always required |
| Time between draw request & funds | 2–4 weeks | Days |
| Credit requirements | Strong credit required | Equity-based — credit less critical |
| Income verification | Full income qualification | Land & project equity driven |
| Approval timeline | 3–6 weeks | 1–2 weeks |
| Self-employed / non-traditional income | Difficult | Not a barrier |
| Rate | Lower | Higher — reflects flexibility & speed |
| Tarion Warranty | Mandatory | Not required if builder has proven prior build references |
How the Draw Process Works
With private construction financing, the total loan amount is approved upfront based on the land value and completed project value (as-complete appraisal). Funds are held in trust and released in draws as construction progresses. Here’s how it flows:
Who Uses Private Construction Financing?
- Self-employed borrowers — income doesn’t qualify conventionally but the land equity and project are sound
- Borrowers with bruised credit — prior bankruptcy, consumer proposal, or credit issues that disqualify from bank construction programs
- Investors building spec homes — building to sell, not to hold; need capital flexibility and speed more than rate
- Tear-down & rebuild projects — existing property demolished; private lenders comfortable with land-only security during the gap
- Custom home builders — one-off builds where the borrower is acting as owner-builder or managing a small GC
- Major renovations exceeding 50% of value — extensive renovations that functionally rebuild the property; treated as construction by most lenders
- Multi-unit builds — duplexes, triplexes, fourplexes on existing lots where conventional construction programs are restrictive
Paul’s approach to construction deals: Construction financing is one of the most detail-sensitive mortgage products. The wrong draw schedule, an underfunded contingency budget, or a lender who creates friction mid-build can derail a project. Paul reviews the full build budget, identifies lenders whose appetite fits the project, and structures the draw schedule so capital flows with the construction timeline — not against it.
What Lenders Look At
Private construction lenders evaluate deals differently from banks. The key underwriting factors are:
- Land value — the current market value of the lot; this is the primary security before the build begins
- As-complete appraisal — the projected value of the finished property; lenders advance against this number, not just the land
- Loan-to-value (LTV) — total loan amount (land + construction budget) vs. as-complete value; most private lenders stay at 65–75% of as-complete
- Build budget credibility — a detailed, itemized construction budget with a contingency reserve (typically 10–15%) demonstrates project management competence
- Builder/contractor track record — experienced GC or builder reduces completion risk; first-time owner-builders face more scrutiny
- Borrower equity contribution — skin in the game; the more equity the borrower has already committed (purchased land, materials), the lower the lender risk
What to Prepare
- Property details — address, legal description, current land value (recent appraisal or purchase price)
- Full construction budget — itemized by trade, with contingency reserve
- Building plans and permits (or permit application status)
- Contractor / GC information and references (or owner-builder declaration)
- As-complete appraisal (Paul can arrange through approved appraisers)
- Proposed draw schedule aligned to construction phases
- Personal net worth statement and ID
- Exit strategy — selling on completion (spec) or refinancing into term mortgage