Short answer first. Construction financing is not a normal mortgage that arrives in one piece. It arrives in stages, called draws, and each one is released only after an inspector confirms the work behind it is done. That single difference drives everything else: why you need cash up front, why builders care about your lender, and why timelines slip. There is also a much simpler product, purchase plus improvements, that covers most renovation situations and that far too few people know exists. Here is how both actually work.
Two very different products
People use "construction financing" to mean two things that have almost nothing in common. Knowing which one you need saves a lot 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. Instead of buying it, then scrambling for a line of credit to renovate, you roll the renovation into the purchase mortgage. The lender lends against the value the home will have after the improvements, not its current state.
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 is part of the mortgage at mortgage rates rather than credit card or line of credit rates. 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 willing to wait for it.
Purchase plus improvements is reimbursement, not 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, but 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 appraiser visits and confirms the stage is genuinely complete. Then the funds release. This is why cash flow is the defining problem of a build: the work must 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 BC, the Builders Lien Act requires a portion of construction funds to be held back, commonly 10%, for a set period after substantial completion. This protects subcontractors and suppliers who have not been paid. It is not your lender being difficult, it is statute. Budget for the fact that the last chunk of your money arrives after everyone else has finished and the lien period has run out. People forget this and end up short at the worst possible moment.
What lenders want before they say yes
Fixed-price contract with a qualified builder. Cost-plus arrangements and owner-builds are harder to finance and some lenders will not touch them at all.
Full plans and specifications. Not sketches. The appraiser values the finished building from these.
Building permit. Or clear evidence it is coming.
Detailed budget with contingency. Lenders like to see 10% to 15% set aside for surprises, because there are always surprises.
Proof of new home warranty. In BC, new homes generally require warranty coverage from a licensed residential builder.
Your own income and credit qualifying as normal. You still have to carry the finished mortgage.
Owner-builders: the honest version
If you plan to build it yourself, 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. The options that remain are a smaller group of lenders, usually with a larger down payment requirement, or private financing for the construction period with a refinance to a normal mortgage at completion. It is doable. It is 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 layers. Lenders care about road access, water source, septic approval, and whether the finished home will actually be sellable if they ever needed to. On the coast, a build on a well and septic with a long private driveway is a 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 too, just earlier in the process.
What actually goes wrong
Cost overruns are the obvious one, and they are why the contingency exists. But the failure I see more often 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 to be paid and the next trade is booked. Two weeks of administrative delay becomes a month of lost building season. The fix is unglamorous: request draws early, keep the lender informed of the schedule, and make sure your builder understands how your specific 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 changes that increase the cost without increasing the appraised value come out of your pocket, not the mortgage. Decide on the finishes before you start.
Frequently asked questions
Do I pay a mortgage payment during construction?
Usually you pay interest only on the funds that have been advanced so far, not 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, which 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 and be 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?
More than for a purchase, typically. 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 by lender and project.
What if my build costs more than the appraisal says it is worth?
You cover the difference. Lenders lend against appraised value, not against what you spent. This is why over-building for a neighbourhood is financially risky and why the appraisal happens from the plans up front.
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. The financing may be a refinance of your existing home rather than a true construction mortgage, depending on the scale.
Builds and big renovations are the files where having someone in your corner matters most, because the lender's process is genuinely complicated and the cost of a delay is measured in weeks of trades sitting idle. If you are planning something, talk to me before you sign with a builder, not after. If the project is really about pulling equity out of your current home, the equity options guide may be the better starting point.
