Planning to build a new home or complete a major renovation?

Construction financing is designed differently from a traditional mortgage. Instead of receiving all funds at once, financing may be released in stages as construction progresses.

At SGD Mortgages, we help clients explore financing options for new builds, custom homes, major renovations and other qualifying construction projects.

What Is Construction Financing?

Construction financing is used to fund the building or major improvement of a residential property.

Depending on the project, funds may be advanced:

• In one amount for smaller improvement projects

• In stages as construction reaches specific milestones

• According to lender inspections and project requirements

For larger renovations and new construction, lenders commonly use progress advances, also known as construction draws.

What Can Construction Financing Be Used For?

Build a New Home

Finance the construction of a new residential property from the ground up.

Custom Home Construction

Build a home designed around your specific plans, property and lifestyle.

Major Renovations

Finance significant improvements such as additions, structural work, major interior renovations or extensive upgrades.

Purchase + Improvements

Certain mortgage programs may allow eligible buyers to finance both the purchase of a property and planned improvements based on the home's expected value after the work is completed.

How Do Construction Draws Work?

Unlike a standard mortgage, construction funds may not be released all at once.

For larger projects, financing is generally advanced as work is completed.

A simplified example might look like:

Initial Stage

Construction begins using the agreed financing structure and borrower funds as required.

Progress Draw

Once a stage of construction is completed, an inspection or progress review may be required.

Additional Advances

Further funds are released as the project reaches additional approved milestones.

Completion

Once construction is substantially complete and final lender requirements are satisfied, the final advance is released.

The number and timing of advances vary by lender and project.

Why Are Inspections Required?

Before releasing a construction draw, the lender may require an inspection to confirm:

• The work completed so far

• The approximate percentage of construction completed

• Whether construction is progressing according to plan

• The current value of the property

• Whether the requested advance is supported by the work completed

These inspections help ensure the financing remains aligned with the value being created through construction.

Financing a New Build

CMHC recognizes several types of new-construction arrangements.

Owner-Built Home

You own the land and either perform some of the work yourself or manage the construction project.

Contract-Built Home

You own the land and hire a single builder or general contractor to construct the home.

Builder Pre-Sold Home

The builder retains ownership of the land during construction, and you have an agreement to purchase the completed home.

Different lenders have different requirements for each construction structure.

Financing Major Renovations

Construction financing isn't limited to brand-new homes.

It may also be used for qualifying improvement projects such as:

• Home additions

• Kitchen renovations

• Bathroom renovations

• Basement finishing

• Structural improvements

• Major repairs

• Energy-efficiency upgrades

• Extensive interior or exterior renovations

For insured financing under CMHC Improvement, smaller projects may qualify for a single advance, while improvement costs above 10% of the home's as-improved value generally use progress advances.

What Is “As-Improved Value”?

For renovation and construction financing, lenders may look at what the property is expected to be worth after the planned work is completed.

This is known as the as-improved value.

For example:

Current Home Value: $700,000

Planned Renovations: $100,000

Estimated As-Improved Value: $850,000

The lender will use its approved valuation process to determine the value it can rely on for financing.

Construction cost does not automatically equal the increase in property value.

What Will Lenders Look At?

Construction financing requires more information than a typical mortgage application.

Lenders may review:

Income & Credit

Your income, debts, credit history and ability to manage the financing.

Land or Property

Whether you already own the land or property and how much equity is available.

Construction Budget

A detailed estimate showing the expected cost of completing the project.

Plans & Specifications

Architectural drawings, building plans, permits and project specifications may be required.

Builder or Contractor

Lenders may review the experience and qualifications of the contractor or builder.

Construction Contract

For contract-built homes, a signed building contract may be required.

Project Timeline

The lender will want to understand when construction is expected to begin and finish.

Cost Overruns

You may need to demonstrate that you have sufficient funds available to deal with unexpected construction costs.

Your Down Payment & Equity

Construction financing often requires the borrower to contribute equity to the project.

That contribution could come from:

• Cash

• Equity in land you already own

• Equity in an existing property

• Other acceptable sources, depending on the lender

The amount required depends on the type of project, property, mortgage insurer and lender.

Under CMHC Improvement, eligible owner-occupied one- or two-unit properties can currently receive insured financing of up to 95% of the as-improved value, subject to qualification and program requirements.

Construction Financing Costs to Consider

Building or renovating involves more than the construction budget itself.

Be prepared for potential costs such as:

• Architectural or design fees

• Building permits

• Appraisal fees

• Progress inspection fees

• Legal fees

• Contractor deposits

• Land development costs

• Utility connections

• Municipal fees

• Construction insurance

• Taxes

• Unexpected cost overruns

Building a contingency into your budget can help protect your project from unexpected expenses.

What Happens If Construction Costs Increase?

Cost overruns are one of the biggest risks in a construction project.

Labour costs, materials, design changes and unexpected site conditions can all increase the final project cost.

CMHC specifically requires lenders to consider whether the borrower has the financial capacity to cover cost overruns.

Before starting, it is important to:

• Build a realistic budget

• Include a contingency reserve

• Avoid unnecessary changes once construction begins

• Keep detailed records

• Understand which expenses your financing will and will not cover

Construction Mortgage vs. Traditional Mortgage

Traditional Mortgage

Generally used to finance an existing or completed home, with the mortgage funds advanced at closing.

Construction Financing

Funds may be advanced progressively as the home is built or improvements are completed.

Once construction is complete, the financing may transition into regular long-term mortgage financing depending on the lender and mortgage structure.

Why Work With SGD Mortgages?

Access to Multiple Lenders

Construction mortgage requirements can vary significantly between lenders.

We can compare available financing options instead of limiting your project to one bank's guidelines.

Financing Tailored to Your Project

A custom build, owner-built home and major renovation don't necessarily require the same financing structure.

We'll help identify options suited to your specific project.

Help With the Draw Process

We'll help you understand how construction advances, inspections and lender requirements work before construction begins.

Review the Full Financial Picture

We'll consider your project budget, land or property equity, income, credit and long-term mortgage needs.

Guidance From Planning to Completion

From preparing your financing application to navigating construction draws and final mortgage funding, we'll help you understand each stage.

Ready to Build?

Whether you're planning a custom home, starting from vacant land, or transforming your current property with a major renovation, the right financing plan should be in place before construction begins.

Let SGD Mortgages help you explore construction financing options and build a plan around your project.