Construction financing is not a normal mortgage that arrives in one piece, and that is the thing worth understanding before anything else. It arrives in stages, called draws, and each one is released only once an inspector has confirmed the work behind it is done. That single difference drives everything else: why you need cash up front, why builders care which lender you use, and why timelines slip. There is also a much simpler product called purchase plus improvements, which covers most renovation situations and which far too few people know exists. Here is how both of them actually work.
Two very different products
People use the phrase construction financing to mean two things that have almost nothing in common, so knowing which one you need saves a great deal of confusion.
| Purchase Plus Improvements | Construction draw mortgage | |
|---|---|---|
| Best for | Renovating a home you are buying, or your own home | Building new, or a renovation large enough to be a rebuild |
| How money arrives | One lump, released after the work is finished | Multiple draws through the build |
| Typical size | Often up to about 10% to 20% of the improved value | Whatever the project costs |
| Complexity | Close to a normal mortgage | A different animal: inspections, holdbacks, and schedules |
| Who can use it | Most buyers and owners | Requires a qualified builder, permits, and fixed plans |
Purchase plus improvements, the underused one
This is the program I wish more buyers knew about. You are buying a home that needs work. Rather than buying it and then scrambling for a line of credit to renovate, you roll the renovation into the purchase mortgage itself. The lender lends against the value the home will have once the improvements are done, rather than against its current state.
Here is an illustrative example. You buy a place for $500,000 that needs a $40,000 kitchen and flooring job. With quotes in hand, the lender approves against an improved value of roughly $540,000. You still put your down payment against the purchase, and the renovation money sits inside the mortgage at mortgage rates rather than on a credit card or a line of credit. The catch is in the timing: you pay for the renovation first, and the lender reimburses you once the work is verified. You need access to that cash, or a contractor who is willing to wait for it.
Purchase plus improvements is a reimbursement rather than an advance. Plan for the gap between paying the trades and being paid back.
How a construction draw mortgage works
For a real build, the lender advances money in stages tied to completion. The exact schedule varies from lender to lender, and a common shape looks like this.
| Draw | Typical trigger | Rough share of funds |
|---|---|---|
| First | Foundation complete, or land plus initial work | About 15% to 25% |
| Second | Lock-up: framed, roofed, windows and doors in | About 30% to 40% |
| Third | Drywall, interior work substantially done | About 20% to 30% |
| Final | Completion, occupancy permit issued | The remainder, less any holdback |
Before each draw, an inspector or an appraiser visits and confirms the stage is genuinely complete, and then the funds release. This is why cash flow is the defining problem of a build. The work has to be done before it is paid for, which means you or your builder are always funding the current stage out of pocket.
The builders lien holdback
In British Columbia the Builders Lien Act requires a portion of construction funds to be held back, commonly ten percent, for a set period after substantial completion. That protects subcontractors and suppliers who have not been paid. It is not your lender being difficult, it is statute. Do budget for the fact that the last chunk of your money arrives after everybody else has finished and the lien period has run out. People forget this and find themselves short at the worst possible moment.
What lenders want before they say yes
A fixed-price contract with a qualified builder. Cost-plus arrangements and owner-builds are harder to finance, and some lenders will not consider them at all.
Full plans and specifications. Not sketches. The appraiser values the finished building from these.
A building permit. Or clear evidence that one is coming.
A detailed budget with contingency in it. Lenders like to see ten to fifteen percent set aside for surprises, because there are always surprises.
Proof of new home warranty. In British Columbia a new home generally requires warranty coverage from a licensed residential builder.
Your own income and credit qualifying as normal. You still have to carry the finished mortgage at the end of it.
Owner-builders, honestly
If you plan to build it yourself, the financing is genuinely harder. Most prime lenders decline owner-builds outright, because their risk is that you run out of money or skill halfway through and they are left holding a partial house. What remains is a smaller group of lenders, usually asking for a larger down payment, or private financing through the construction period with a refinance to a normal mortgage at completion. It is doable. It is simply not the same conversation as hiring a licensed builder, and it is worth knowing that before you plan around it.
Rural and remote builds
Building outside a town adds a few layers. Lenders care about road access, the water source, septic approval, and whether the finished home would actually be sellable if they ever needed it to be. On this coast, a build on a well and a septic field with a long private driveway is a perfectly normal file to me and an unusual one to a bank underwriter in Toronto. Much of what I wrote about well and septic financing applies here as well, just earlier in the process.
What tends to go wrong
Cost overruns are the obvious one, and they are exactly why the contingency exists. The failure I see more often, though, is timing. A draw gets requested, the inspection takes a week to schedule, the funds take a few days after that, and meanwhile the framer wants paying and the next trade is booked in. Two weeks of administrative delay turns into a month of lost building season. The fix is unglamorous: request draws early, keep your lender informed of the schedule, and make sure your builder understands how your particular lender releases money before the first shovel goes in.
The second one is scope creep. Every change to the plans can require re-approval, and a change that increases the cost without increasing the appraised value comes out of your pocket rather than out of the mortgage. Settle the finishes before you start.
Questions people ask me
Do I pay a mortgage payment during construction?
Usually you pay interest only on the funds advanced so far rather than on the full amount, so payments start small and grow with each draw. Many people are also paying rent or another mortgage at the same time, and that is the real budgeting challenge.
Can I use purchase plus improvements for anything I want?
It has to be improvements that add value to the property, supported by written quotes. Kitchens, bathrooms, flooring, roofing, windows and additions generally qualify. Furniture and appliances usually do not.
How much down payment do I need to build?
Typically more than for a purchase. Many construction lenders want a meaningful equity position, and if you already own the land free and clear that often counts toward it. The specific number varies with the lender and the project.
What if my build costs more than the appraisal says it is worth?
You cover the difference. Lenders lend against appraised value rather than against what you spent, which is why over-building for a neighbourhood carries real financial risk and why the appraisal happens from the plans at the outset.
Can I get a construction mortgage for a laneway house or suite?
Often yes, and it can be an excellent use of equity since it creates rental income. Depending on the scale, the financing may be a refinance of your existing home rather than a true construction mortgage.
Builds and big renovations are the files where having somebody in your corner matters most, because the lender's process is genuinely complicated and the cost of a delay gets measured in weeks of trades sitting idle. If you are planning something, do talk to me before you sign with a builder rather than after. And if the project is really about pulling equity out of your current home, the equity options guide may be the better place to begin. 🔨
