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Builder’s mortgage provides added convenience during new home construction

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This article was published 14/03/2025 (188 days ago), so information in it may no longer be current.

  Are you planning to have a new house built?

If so, you should familiarize yourself with what a builder’s mortgage is, says a lending expert with Access Credit Union.

Retail lending manager Joel Billing says builder mortgages are designed specifically to assist homebuyers who are working with a contractor or builder to build a new home.

Unlike a regular mortgage that is paid out in a single lump sum when the purchase of an existing home is completed, a builder’s mortgage is disbursed in stages throughout the building stage of a new house. The first stage is the foundation or ‘floor on’ stage followed by the framing stage, then the roof or ‘lockup’ stage, and finally the finishing stage.

A builder’s mortgage provides a couple of distinct advantages over a regular mortgage, Billing says.

The first is that it can be tailored to meet the unique requirements of the homebuyer’s dream home and allow them to customize their plans rather than simply choose a pre-designed plan.

Another advantage is the homebuyer is only required to make interest payments during the construction phases. Principle plus interest (PI) payments only begin when construction is complete and the new home is ready to be occupied. That means that if $100,000 is required for the first stage of construction, the mortgage holder is only required to pay interest on that sum during the initial stage.

“A builder’s mortgage is a convenience,” Billing says.

“It allows people to remain in their current home until their new home is complete … and they don’t have to make payments on both their current home and their new home that is under construction.”

Typically, most financial institutions require a builder’s mortgage to be paid back within 12 to 15 months.

Billing suggests new home buyers come up with a detailed plan and set a realistic budget for their new dwelling prior to applying for a builder’s mortgage to ensure the finished product meets their expectations.

“Sometimes people come in and say I want to build a new house. I’ll look at them and say how much do you need? They’ll go, ‘I don’t know’,” Billing says.

“What we’ve found is inadequate planning or budgeting is going to lead to delays and increased costs. It’s important to work with your contractor, your builder, your third party designer to get a detailed plan and know what that plan outlines. By having a complete cost estimate it is going to confirm how much somebody actually needs to bring their dream home to completion.”

Billing also recommends members keep in regular communication with their financial institution during construction of their new home and alert them to any changes in schedules since builder mortgage funds are only paid out when work on each phase is complete.

It’s also important new home buyers are aware that builder’s mortgages are subject to a provincially-mandated lien holdback. This is a set amount of money (typically 7.5 per cent in Manitoba) withheld from payments to a contractor to ensure there are funds to pay contractors and subcontractors in the event a lien is filed.