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Construction Financing

Looking to build? Our feature flexible, competitively priced, custom tailored financing solutions can help make your vision a reality. Call to find out how!

When looking to build a new home, extend your current property, or develop a high-rise project, it can be an exciting time. However, good decisions need to be made and this is especially true when it comes to money. Ultimately, financing is one of the biggest decisions you will make because, if done incorrectly, you could be left in debt for many years to come. With this in mind, we should introduce ‘construction financing’.

 

Otherwise known as construction loans, self-build loans, and many other names similar, construction financing is a short-term arrangement made to finance any real estate-related projects. To get started, the home or land owner will take out the loan to cover all the related costs of the project and this helps to get started before a more permanent source of funding becomes available. For the lending company, the loans have more risk than regular loans so the interest rates are generally much higher.

 

At this point, it is important to note that the loan is essentially taken out for the builders so they have the money to complete the project. As soon as the work is completed, the permanent loan - also called the ‘end loan’ - can be used to pay off this short-term deal and you can carry on as usual. In addition to this, the construction loan can be refinanced into the permanent mortgage and this is the route that many people choose.

 

At the very least, a 20% down payment is normally required from most lenders on the loan. To be approved and the finance made available, you will also have to prove the work you plan to do as well as proving that you have already contacted a qualified and trusted builder. In the application, you will also need a ‘blue book’ which shows all the construction details for the project but we will go over all of this in more detail a little later!

 


 

Associated Costs

 As we have seen, all of the related costs will be covered by this loan but what exactly does this mean? Over time, you are likely to see a number different costs so you should be aware of what is covered and what isn’t. Below, we have a breakdown of these expenses and how they work!

 

Land Value

At the start of the project, you might want to cover the purchase of the land and this can be done with construction financing. Of course, this might not be necessary depending on whether you already own the land or not so this is normally dealt with on a case-by-case basis. If you already have the land and are looking to take the next step into construction or if you are extending your home, keep reading.

 

Hard Costs

 Firstly, the loan will cover any costs that are directly related to the building work being done so this means labor as well as the raw materials. Without either of these two factors, the construction cannot start so these are both essential to your project.

 

Soft Costs

 After this, you have costs that are indirectly related to the project which means that they arise as a result of something else. For example, this could include engineering fees, permit fees, and architectural fees. If the cost doesn’t directly relate to contract but it does enhance the project somewhat, it falls into this category.

 

Contingency Reserve

Although we try to plan property costs as closely as possible, there is always the chance of seeing some unforeseen expenses along the way so this contingency fund is perfect. Generally, you will find that an extra 10% will be added on top of the construction costs as a contingency account. At times, orders will need to be changed or upgrades are required so this contingency amount is highly recommended. If you find that it doesn’t get used by the end of the project, at least you had it there for security and peace of mind.

 

Allowances

 After the actual construction, you will probably need items in the home or extra room such as flooring and other products to make it ‘livable’. For these costs, they are covered well in this section.

 

Total Costs 

Taking all of the previous categories we have discussed in mind, you will come up with a total cost for the entire project. When the company is deciding how much you can borrow, they will take the lesser of the total costs or the appraised value.

 

Lot Equity

 Finally, lot equity may also be found and this is the difference in value between the loan to be paid off for the land and the appraised land value itself. If there is any at all (sometimes there isn’t), it will be credited towards the down payment.

 


 

Application Process

 Now you have seen what costs are covered and understand how the process works a little more, you need to know how to apply. Here, we have provided a brief step-by-step guide so you can get the general idea. Ultimately, your experience may differ slightly depending on the project you have in mind but this is a general guide.

 

Step 1

At the very start, you will need to obtain the architectural drawings for your project. In addition to a floor plan, it must have the exterior, dimensions, descriptions of the materials, and more. For example, the roofing may consist of lightweight tiles, shingles, or many other materials so this must be clarified. Once this has been given to the appraiser, they can decide a value subject to the specifications.

 

Step 2

 Here, an agreement will be made with a contractor for the complete project. Using the plans from ‘step 1’, the builder should provide you with a quote as well as timings. After you have obtained this, it should be kept together with the initial plans and specifications for the project.

 

Step 3

 From here, the builder should go off and create a detailed contract with all the costs broken down into sections. Often called the ‘draw schedule’, this should match up with the quote in the last step and this helps the money to reach the owner or the builder before the project begins.

 

Step 4

Next, a single case worksheet is used as an assessment of all the costs. Eventually, this document - it may have a different name with different companies - will help decide the maximum loan amount. Normally, the lending company will take control of this step so you don’t have to worry about anything except for providing accurate information at the beginning.

 

Step 5

 Finally, the builder will provide their own information but this isn't something you need to do or chase up. If you choose a trusted and reliable contractor, there won’t be any problems at this stage.

 

Additional Information

To finish, we have some extra information that might prove interesting for you. For example, a typical construction loan will last for around 12 months. During this time, only the interest payments will be necessary as your home or extension takes place. If you are building a new home whilst living in another, you don’t necessarily have to sell first because of this 12-month period. Rather than moving twice, the loan allows you to stay in your existing home while the building company work on your future home. Then, you can move in upon completion and sell in the same window.

 

As you can see, this can be an incredible tool when building a new home or completing some renovation work on your existing property. Rather than having to find the funding or struggle with some financial difficulties, you can simply borrow this short-term option. Then, as soon as you are ready, you can pay it off with a more permanent source such as a mortgage. Essentially, the mortgage will repay the loan and you can continue with the mortgage as you would normally.

 

As you can imagine, there are several variables within this process such as the builder you choose, the value of the property, the value of the work being done, and more. However, we can help you with whatever you may need. We realize that building your home is an exciting time so we offer a flexible service at an affordable price. Once you contact us, we will work towards a tailor-made financial solution to help make your dream come true! 

 

Get Construction Financing when you:

  • Take on a single home construction project
  • Develop sub-divisional or high-rise projects
  • Finance commercial development
  • Fund conversion projects

 

CASE STUDIES:

 

Study 1: Luxury Home Construction

Asset Value:1,850,000
Needed: 902,500

Challenge

  • Purchase of renovators dream + Construction of property in a high demand area surrounded by Multi-million dollar homes mixed between old tear-down ready properties
  • Client with bad credit and poor repayment history
  • 0% Down

Solution

  • Purchase with Private Mortgage and Vendor Take back portion
  • Competitive Private Mortgage rate
  • Client was able to build property with no money invested
  • Property sold at a profit

 

Study 2: Mixed Commercial/Residential Building

Asset Value upon completion: 22,000,000
Needed: 16,000,000

Challenge

  • Builder had poor credit
  • Bank would not want to provide money for construction
  • Current mortgage was coming due

Solution

  • Found 3 Million Mezzanine financing which guaranteed 1st mortgage from the bank
  • Bank provided 1st and Construction Mortgage
  • Building completed at profit

 

 

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Testimonials
  • In the same week a freak storm took out my sunroom and car with a fallen branch. My insurance >wouldn’t cover it and I didn’t know what to do. Benson offered me rates on construction financing that I could actually afford, and provided me with the loan I needed with almost no questions asked. What a life-saver!
    Anthony P.,
  • My wife and I would like to personally thank you for the great service you and your company has provided us with regards to our mortgage needs. We previously signed up with big bank insurance company for many, many years.
    Eugene and Ann L., Thornhill, Ontario
  • In the same week a freak storm took out my sunroom and car with a fallen branch. My insurance wouldn’t cover it and I didn’t know what to do. Benson offered me rates I could actually afford, and provided me with the loan I needed with almost no questions asked. What a life-saver!
    Anthony P.,
  • My husband and I just want to thank Matt and the rest of the team at Benson Mortgages for helping us secure financing for our renovation. Your transparency and professionalism were greatly appreciated. You folks really care about your clients. Always presenting the options available and their pros and cons. Always taking the time to answer countless questions in a timely fashion, Never rushing through a meeting or a discussion.
    Mary Nagai,
  • Understanding all of the current rates and legal issues with buying our first home was overwhelming before we came to Benson. They sat down with us and took the time to explain everything in terms we could appreciate and understand. They alleviated the stress we were feeling and allowed us to get approved for our dream home when we thought it was impossible. Much gratitude, we would highly recommend them!
    Kate & Charles D.,
  • Refinancing our home with Benson was one of the best financial decisions we ever made. We paid off thousands in credit card debt, added on a new deck, and only increased our regular monthly mortgage payments by $200! The amazing interest rate that these guys negotiated for us took the stress out of the over 18% interest rates on our credit cards! I cannot thank you enough for the feeling
    Dan G.,
  • I am so grateful to you guys. I just cannot thank you enough for the job you did on my mortgage. I am not sure how you did it but the interest rate you got me is even better than my bank offered me. Excellent job!
    Mrs. Svetlana K., North York, Ontario
  • I just wanted to pass along a big thank you as I was very impressed by the level of service I received from Benson Mortgages. I will definitely recommend you to everyone I know!
    Andrew J., North York, Ontario
  • With my credit history haunting me I didn’t think that I would ever be able to build my equity back by owning my own home. I got referred to Benson through a friend and after sitting down for a very detailed financial conversation I walked away with a private mortgage in hand, with payments I could easily manage. Thanks to the whole Benson team!
    Mark T.,
  • Thank you so much for helping me and my family. You did something no one else could - found me a rate that was optimal to my employment status. I never knew that comparing mortgage rates was this easy!
    Paul T., Richmond Hill, Ontario
  • I was impressed at how quickly my pre-approval went through. The level of service and rate info was outstanding, much better than dealing with a bank directly.
    Alex, Vaughan, Ontario
  • I experienced such great customer service! Benson made it easy for me to get the help I needed and explained everything to me in a completely transparent manner. Clearly if you are in a situation where you need this service, you’re incredibly grateful for any kind of stress reduction and to have professionals on your side that are truly helpful.
    Kim H.,
  • With my credit history haunting me I didn’t think that I would ever be able to build my equity back by owning my own home. I got referred to Benson through a friend and after sitting down for a very detailed financial conversation I walked away with a private 2nd easily manage. Thanks to the whole Benson team!
    Mark T.,
  • I just want to thank you for hooking me up with a comprehensive and affordable quote for my mortgage. You have made it very easy for me to make a decision and save thousands of dollars on low-rate mortgages.
    Linda K., Toronto, Ontario
  • The flexibility and support Benson offered us for our commercial development investment was impressive. We were able to secure the funds we needed with minimum hassle, and the payment plan they structured for us fits precisely with our business model. They offered us far more flexibility than we could have found working with any bank on this construction project
    Micheal P.,
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