If you’re thinking of customizing your next home, there are special considerations you need to be aware of above and beyond financing a resale home – with ongoing decisions to make, contracts and builders to manage, onsite inspections to oversee and longer wait times before your move-in date. There are also some terrific benefits, including being able to fully personalize your floorplan, materials, and features.
New-home buyers in Ontario received enhanced protection on February 1st, 2021 when the Home Construction Regulatory Authority (HCRA) was introduced as the province’s new-home building industry regulator.
HCRA is responsible for:
· Regulating and licensing new-home builders and vendors
· Enforcing professional standards
· Implementing a formal complaints process
· Investigating illegal building practices
· Maintaining a directory of Ontario builders and vendors
Before building your own home, it’s best to create a plan rather than figuring things out as you go. Prioritize your needs and wants so you have a clear picture of how the finished product should look. Good planning will help reduce obstacles and ensure your build quotes are accurate so you won’t be asked for more money later in the project.
There are considerable expenses associated with building a home, so creating a budget and sticking to it is essential. Unforeseen issues can occur during the construction process, though, so be sure to incorporate a cushion to offset any extra costs. This is especially important if you’re spending money to live somewhere while your house is being built. And don’t forget to include ancillary costs for landscaping, decking, fencing, driveway, and furniture.
Build a strong team
Before talking to a builder, consult with a mortgage broker who’s knowledgeable about construction, safety codes, and other legal requirements to ensure you fully understand the complexities associated with a new build. A qualified broker can offer guidance to help you decide whether building a home makes sense for you as well as explain the different loan options and recommend appropriate lenders.
Another important member of your team is the builder. And if you aren’t buying off pre-set plans, you’ll also want to hire an architect and/or designer to help with the layout and blueprints. Your team will work together to determine whether everything you want is feasible and provide a breakdown of associated costs. If you’re purchasing land on which to build, you’ll also need to work with a realtor who specializes in land purchases and is familiar with available plots in your area. Ask your builder to recommend a structural engineer as well as skilled tradespeople such as electricians, plumbers, and landscapers.
From the first step to the last, you’ll want to be involved as much as possible. This means maintaining regular contact with the builder and overseeing contractors to ensure every phase remains on track.
Financing your new build The financing process for a new build begins with determining the type of mortgage you require – depending on whether you’ll be building on land you own outright (construction mortgage) or building on land you’ll be purchasing (land mortgage):
1) Construction Mortgage. A construction mortgage is a short-term loan used to cover the cost of building your home. Your lender provides the funds in installments, or draws, in various phrases throughout the construction period until completion. During each phase, the progress is inspected to ensure everything is on schedule. Once it’s deemed satisfactory, the lender will release the applicable funds. When construction is complete, the loan amount becomes due and is rolled into a traditional mortgage. Construction loans typically last less than one year, ending when construction is complete.
2) Land Mortgage. If you’ve decided to buy land on which to build, you’ll need to finance the lot through a land mortgage. You’ll be required to make a sizeable deposit towards the purchase and your minimum down payment requirement will be larger in order to reduce the upfront capital from the lender. You’ll likely be required to provide proof from the municipality that you’re permitted to build on the land, confirmation that it’s zoned for residential use, and undertake environmental assessments to prove there are no hazardous considerations such as soil/water issues or sewage/well problems.
Lender options
Much like traditional mortgages, you’ll want to get preapproved for your financing before moving ahead. Not all lenders offer new construction financing, but your mortgage broker will be able to guide you.
Most banks offer construction financing but, due to inherent risks, construction mortgages are less attractive for traditional lenders. Bank terms are typically more restrictive than those offered by alternative lenders, for instance, and they may only offer a higher, less competitive rate once the build is complete. You may also be required to own the land you’re building on before securing funding from a bank, which rules out a land mortgage option. Banks also tend to have inflexible installment schedules.
Credit unions typically offer more flexible options than banks. Most will provide unlimited draws and monthly interest-only payments during construction, although there is often a fee required based on the future funding amount. In general, credit unions have more forgiving qualification standards and offer more personalized service in a community-focused atmosphere.
Obtaining a construction mortgage from a private or alternative lender allows you much more freedom and flexibility, but typically comes with a higher cost of borrowing. Some private lenders specialize in construction financing and have a better understanding of the costs and risks involved. Private mortgage loans are short-term by nature, which is ideal for covering the building phase. You can then secure a longer-term mortgage with a lower rate from a traditional lender when the build is complete.
Have questions about building your own home? Answers are a call or email away.