What is a construction mortgage in Canada and how does it work?

In Canada, a construction mortgage is a specialized loan designed to finance the building of a new home or a major renovation, with funds disbursed in stages (known as "draws") as construction milestones are met. Unlike a traditional mortgage, you only pay interest on the funds released, and the loan typically converts to a conventional mortgage upon project completion.

For Canadian small business owners or consumers, expect to provide a significant down payment, typically 20% to 30% of the total project cost, as lenders usually finance up to 75% of the construction. Funds are released incrementally after independent inspections confirm completed work, such as foundation, framing, and finishing, which helps manage cash flow but requires careful planning to align with your contractor's payment schedule. Construction mortgage interest rates are generally higher than conventional mortgages due to the increased risk, and you'll make interest-only payments during the build phase. It's crucial to have detailed construction plans, permits, and a realistic budget, and consider working with an approved builder or contractor to increase your chances of approval. Finally, be aware that some lenders may offer a "completion mortgage" where the full amount is released only after construction is finished, requiring alternative financing during the build.