Construction Mortgages in Ontario

Building a home is one of the most significant financial undertakings you can make. Unlike purchasing an existing property, construction financing involves a different process, a different loan structure, and a different set of requirements. Understanding how construction mortgages work in Ontario is essential before you break ground.

As a Level 2 Mortgage Agent with DLC National Ltd., I help clients across Hamilton, Burlington, Brantford, St. Catharines, Caledonia, and the Kawarthas secure construction financing through both institutional and private lenders.

What Is a Construction Mortgage?

A construction mortgage is a short-term loan used to finance the building of a new home or a major renovation. Unlike a standard mortgage where funds are advanced in full at closing, construction mortgage funds are released in stages called “draws” as the project reaches predefined milestones.

During the construction phase, you typically make interest-only payments on the amount that has been drawn. Once construction is complete, the loan either converts to a conventional mortgage or is refinanced into a standard mortgage with regular principal and interest payments.

Types of Construction Financing

Draw Mortgage (Progress Advance)

This is the most common construction financing model. The lender advances funds in stages based on verified construction progress. Before each draw is released, the lender arranges an inspection to confirm the work has been completed. This protects both the lender and the borrower.

Completion Mortgage

A completion mortgage is arranged during the construction phase but does not fund until the home is fully complete. The builder typically finances construction through their own credit lines, and your mortgage funds at final closing. This model is more common with established production builders.

The Draw Schedule

A standard construction draw mortgage in Ontario follows a four-draw model aligned with key construction milestones:

• Draw 1 — Foundation (approx. 15% complete): Funds are released once the foundation is poured and inspected.
• Draw 2 — Lock-Up (approx. 40% complete): Framing is complete, the roof is on, and the building is enclosed with windows and exterior doors installed.
• Draw 3 — Drywall (approx. 65–70% complete): Interior drywall is hung, plumbing and electrical rough-ins are complete, and insulation is installed.
• Draw 4 — Completion (approx. 98–100% complete): All finishing work is done, occupancy permit is obtained, and the home is move-in ready.

Some lenders use a five-draw model that includes an additional stage at approximately 85% completion. Each draw is subject to a lender inspection to verify progress.

Ontario Construction Act: The 10% Holdback

Under the Ontario Construction Act (Sections 22 and 24), 10% of every construction draw must be held back by the lender. This statutory holdback exists to protect against construction liens filed by subcontractors or suppliers. The holdback is released 45 days after the Certificate of Substantial Performance is published, provided no liens have been registered against the property.

Down Payment and Equity Requirements

• Owner-occupied builds: 20% to 30% of total project cost (land plus construction)
• Investment properties: 30% to 40% of total project cost
• CMHC or Sagen insured programs: As low as 5% down on properties up to $500,000 through the Sagen Progress Advance program (up to 95% LTV)
• Private construction lenders: Typically require 25% to 35% equity with a maximum LTV of 65% to 75%

Total project cost includes the value of the land (whether owned or being purchased) and the full construction budget.

Builder and Self-Build Requirements

Lenders have specific requirements for the builder involved in your project:

• Licensed builders with a demonstrated track record of completed residential projects
• A fixed-price building contract between you and the builder
• A detailed construction plan with timelines and cost breakdowns

If you are planning a self-build (acting as your own general contractor), qualification is more limited. Most lenders require you to demonstrate relevant construction experience, industry contacts, and a detailed project plan. Private lenders tend to be more flexible with self-build projects than institutional lenders.

Interest Rates and Payment Structure

During the construction phase, you make interest-only payments based on the total amount drawn to date. For example, if $150,000 of a $500,000 construction mortgage has been advanced after the second draw, you pay interest only on $150,000.

Construction mortgage rates vary depending on the lender type. Institutional lenders offer rates closer to conventional mortgage rates for well-qualified borrowers, while private construction financing typically ranges from 6% to 9% depending on the risk profile and LTV.

Insured Construction Financing: Sagen Progress Advance

The Sagen Progress Advance program allows insured construction financing with as little as 5% down. The program has three streams: Residential Home Builder, Contractor, and Self-Built. Key requirements include a minimum credit score of 600 (or 680 for LTV above 80%), a maximum amortization of 25 years, and payment of the insurance premium in full at the first advance or in instalments over the draw period.

The Completion Mortgage: Transitioning to Conventional Financing

Once construction is 100% complete and an occupancy permit has been issued, the construction loan is either converted to or refinanced into a conventional mortgage. At this stage, you transition from interest-only payments to regular principal and interest payments based on the final appraised value of the completed home.

In some cases, insured financing at completion allows borrowing up to 95% of the final market value, which can be especially advantageous if the completed home appraises higher than the original project cost.

Why Work With a Mortgage Broker for Construction Financing?

Construction mortgages involve more moving parts than a standard purchase. From builder approval and draw scheduling to holdback requirements and completion financing, having a broker who understands the full process is essential.

I work with both institutional and private lenders who offer construction financing across Southern Ontario, including Hamilton, Burlington, Brantford, St. Catharines, Caledonia, and the Kawarthas. Whether you’re building a custom home, adding a secondary dwelling unit, or undertaking a major renovation, I can help you structure the right financing from start to finish.