Construction Financing in BC: How Draw Mortgages Work for a New Home

Construction Financing in BC: How Draw Mortgages Work for a New Home

A regular mortgage pays out in one go on the day you buy. Building a new home works differently. There is no finished house yet for the bank to lend against, so a construction mortgage pays out in stages as the home goes up. These stage payments are called draws.

Understanding how draws work before you start helps avoid the most common money problem on a new build: the work is done and the trades need paying, but the next draw hasn’t come through yet.

How a construction (draw) mortgage works

BC Housing’s guide to hiring a builder describes it simply: a construction mortgage pays in instalments, usually when a milestone is reached or a percentage of the work is complete, and the lender typically inspects the site before releasing each draw.

1. Get pre-approved before you sign a building contract, so you know how much you can borrow and on what terms. Terms vary between lenders.
2. Your own money goes in first. Lenders generally expect your equity (often the land, plus cash) to be used before their funds. CMHC, for example, does not allow insured loan advances on vacant land, and requires your land equity to go toward construction.
3. Work is done, then inspected. When a stage is complete, the lender (or an inspector it hires) checks progress.
4. The draw is released. The lender advances the next portion of the loan, and the builder and trades are paid.
5. Repeat until completion. The final draw is usually tied to occupancy or completion, minus any holdback.

With most construction loans you pay interest on the amount advanced so far, not the full loan, so your payments grow as the house does. Ask your lender exactly how interest is charged during the build.

What the draws look like: an example

On a straightforward lot, building a custom home takes about 10 months from foundation to finish (design and permits come before that, as a separate stage). Using the same example as our build timeline article, a 2,500 sq ft home at a mid-range $300 per sq ft costs about $750,000 to build. A draw schedule tied to the main stages might look like this:

The cash gap: the most common surprise

BC Housing warns that a builder may need to pay subtrades sooner than the lender releases money. Draws come after the work is done and inspected, while framers, electricians and suppliers often expect to be paid as they go. The result can be a short-term gap that you need to cover.

Ways to plan for it:

• Keep a cash reserve on top of your down payment and contingency.
• Make sure the payment schedule in your building contract lines up with your lender’s draw schedule.
• Ask your lender how long it takes to arrange an inspection and release funds after a request.
• Keep design changes to a minimum. Changes add cost that the original loan may not cover.

The 10% holdback

Under BC’s Builders Lien Act, the person paying for the work must hold back 10% of the contract price. This protects you if a subcontractor or supplier goes unpaid and files a lien against your property. The holdback is kept until 55 days after the work is substantially complete. Liens generally have to be filed within 45 days of completion, so if none are filed, the holdback can be released.

For contracts of $100,000 or more, the holdback must be kept in a separate holdback account. Lenders usually build the holdback into their draw schedule, so the final payment arrives after the holdback period. BC Housing lists a builder who won’t discuss holdbacks as a warning sign.

How much equity do you need?

Because land in Vancouver and Burnaby is expensive, many new homes here are valued above $1.5 million once built, which means conventional (uninsured) financing with at least 20% equity. If you already own the lot, its value usually counts toward your equity. CMHC-insured construction loans also require a single builder under contract (or an owner-builder), new home warranty enrolment and approval before construction starts.

What your lender will usually ask for

• A signed building contract with a licensed residential builder
• A detailed cost breakdown, not a one-page quote
• Permit drawings and, once issued, the building permit
• Proof of 2-5-10 home warranty enrolment (see BC’s 2-5-10 warranty explained)
• Proof of your down payment and equity
• Builder’s risk (course of construction) insurance

A quick checklist before you sign

• Get construction mortgage pre-approval before committing to a builder.
• Compare the lender’s draw stages with the builder’s payment schedule.
• Budget a contingency. BC Housing suggests 10 to 20% of the total budget.
• Agree how the 10% holdback will be handled, in writing.
• Confirm who requests draws, who meets the inspector, and how long releases take.

Related reading

• How long it takes to build a custom home in Vancouver or Burnaby
• How to compare builder quotes: fixed price vs. cost-plus
• Construction management vs. general contracting
• BC’s 2-5-10 home warranty explained