Construction and Renovation Loans
The short version
Financing a build or a major renovation works differently from an ordinary mortgage. Rather than one advance at closing, a construction mortgage pays out in stages called draws, with an inspection confirming progress before each release, and you pay interest only on what has been advanced so far. If you are buying a home that needs work, a Purchase Plus Improvements mortgage lends against what the property will be worth once the work is finished, which is far cheaper than paying for renovations with credit. Both require you to fund the work before the money arrives, which is the cash flow reality most people are not warned about. Ontario construction law also requires a holdback on each payment. Approvals are on approved credit.
Which type of financing you need
Four different products get lumped together under this heading, and picking the wrong one is expensive.
- Construction or draw mortgage. For building a home from the ground up, or a renovation substantial enough to count as one. Funds release in stages against inspections.
- Purchase Plus Improvements. For buying a property that needs work, where the improvement cost is rolled into the purchase mortgage. Must be arranged before closing.
- Refinance or line of credit. For renovating a home you already own with enough equity. Usually the simplest route by a wide margin. See refinancing and HELOCs.
- Completion mortgage. For a pre-construction purchase from a builder, arranged near the end rather than at the start.
How draw mortgages work
The lender approves the total, then releases it in tranches as the build progresses. A typical structure advances against the land, then at framing and lock-up, then at drywall and finishing, then on completion, though the stages vary by lender and project.
Before each release an inspector attends and confirms what has actually been completed. The lender advances against verified progress, not against invoices or a schedule, which is why the work has to be paid for before the draw arrives.
During construction you pay interest only on the amount advanced. Once the build is complete the whole thing converts into a normal amortizing mortgage. The two things that consistently go wrong are budgeting for the gap between paying trades and receiving a draw, and underestimating how long inspections and releases take.
Purchase Plus Improvements
If you are buying somewhere that needs a kitchen, a roof or a basement finished, this is usually the cheapest way to pay for it. The lender lends against the improved value rather than the purchase price, and the improvement money becomes part of your mortgage at mortgage pricing rather than sitting on a credit card or a line.
How it runs in practice: you supply quotes before closing, the lender includes the improvement amount in the approval, the lawyer holds those funds after closing, you complete the work, an inspection confirms it and the money is released to you.
Two things to know. It must be arranged before you close, because it cannot be added afterwards. And you need access to the improvement cost in the meantime, whether that is savings, a line of credit or a contractor willing to wait.
Holdbacks and liens
Ontario construction legislation requires a portion of each payment to be held back for a set period after the work is substantially complete. It exists so that unpaid subcontractors and suppliers have something to claim against rather than registering a lien on your title.
Your lender and lawyer administer this, so it is not something you manage yourself, but it affects your planning in one specific way: the final portion of your money arrives some weeks after the work finishes, not on the day. Budget for that.
A lien registered against the property will stop a draw and can stop a closing. If a dispute with a trade is brewing, tell us early, because it becomes a financing problem quickly.
Buying pre-construction
A pre-construction purchase from a builder follows a different path. You pay deposits over the construction period and arrange the mortgage near the end, sometimes three or four years after signing.
The trap is assuming an approval obtained at signing still means something at closing. It does not. The file is underwritten again at current income, current credit and whatever rules apply then, and the appraisal has to support the price you agreed years earlier. People have been caught by all three.
If you have a pre-construction closing coming, start the conversation six months out rather than six weeks. There are solutions when a completion goes wrong, including private financing, but they cost considerably more than planning ahead.
Planning the cash flow
- Add a contingency. Ten to twenty percent over the quoted budget is realistic. Very few renovations come in at quote.
- Budget for the gap. You pay trades, then you get reimbursed. Not the other way around.
- Expect delays at each draw. Inspection, lender review, then release. Build that into your payment schedule with contractors.
- Carry two housing costs if you are not living there. Rent or an existing mortgage runs alongside the interest on the construction advances.
- Keep every invoice and permit. Lenders ask, and the final draw depends on them.
Talk to us before you sign with a builder or accept a quote. The financing structure often changes what is sensible to take on, and it is much easier to shape at the start than to repair halfway through.
Common questions
How does a construction mortgage pay out?
In stages, called draws, rather than as one advance at the start. An inspector confirms the work completed at each stage and the lender releases funds against it. You are paying interest only on what has been advanced, which keeps carrying costs down early on.
Can I borrow for renovations when I buy?
Yes, through a Purchase Plus Improvements mortgage. The lender lends against the value the home will have once the work is done, and holds the improvement funds until it is finished. It is the cheapest way to fund a renovation on a purchase, and it must be arranged before closing rather than after.
Do I have to pay for the work myself first?
For improvement funds on a purchase, usually yes. You or your contractor complete the work, an inspection confirms it, and then the money is released. Plan for that cash flow gap, because it catches people who assumed the funds arrive up front.
What is a holdback?
Ontario construction law requires a percentage of each payment to be held back for a period after the work is substantially complete, protecting against liens from unpaid subtrades. Your lender and lawyer manage it. It means the final portion arrives later than the finish date, which is worth knowing when you budget.
Can I act as my own general contractor?
Some lenders allow it, many do not, and those that do usually want relevant experience and a much more detailed plan. Self-building narrows your lender choice considerably, so raise it at the start rather than after you have a design.
What about buying a pre-construction condo?
That is different again. You pay deposits to the builder during construction and arrange a completion mortgage before final closing, which can be years after you signed. Approvals from that long ago rarely hold, so the file is re-underwritten at current income, credit and rules.