If you’re building a home or completing a major renovation and traditional banks aren’t an option, a private lender construction mortgage might be your best path forward. In Ontario, private lenders offer flexible solutions for custom home builds, investment properties, and unfinished construction projects. This guide explains how these mortgages work, what lenders look for, and how to qualify.
Understanding Construction Mortgages in Ontario
What is a Construction Mortgage?
A construction mortgage is a short-term loan used to finance the building of a home or major renovation. Instead of receiving the full amount upfront, the lender releases funds in stages (called draws) based on the progress of construction.
How It Differs from a Traditional Mortgage
Traditional mortgages finance completed homes. A construction mortgage is riskier for lenders because the house doesn’t yet exist or is under major renovation. It requires inspections, appraisals, and progress reports to trigger funding.
Key takeaway: You need an approved building plan, permits, and a detailed construction schedule to qualify.
Why Choose a Private Lender for Your Construction Mortgage?
Common Use Cases
- Credit issues are preventing bank approval
- Lack of verifiable income (self-employed or seasonal work)
- Incomplete builds or mid-project takeovers
- Buying land and building from scratch
Who Benefits from Private Financing
Private lender construction mortgages are ideal for:
- Owner-builders who manage their own projects
- Small builders without long credit histories
- Investors looking to develop or flip
Common myth: Only large developers qualify for construction loans. In reality, many private lenders cater to individuals and small-scale builders.
How a Private Lender Construction Mortgage Works
The Draw Schedule Explained
Funds are advanced based on specific milestones (rough guide):
| Stage | Description | % Released |
|---|---|---|
| Excavation | Foundation dug and poured | 15% |
| Framing | Framing and sheathing | 20% |
| Lock-Up | Doors/windows installed | 25% |
| Drywall | Interior work starts | 20% |
| Completion | Project finished | 20% |
Important to note: Each stage typically requires an inspection or appraisal to verify progress before the next draw is released.
Role of Appraisals and Inspections
- Initial appraisal: A certified appraiser—often holding an AACI (Accredited Appraiser Canadian Institute) designation—is required to provide a professional estimate of the property’s future value based on the proposed construction plans. This “as completed” appraisal is crucial in determining how much the lender will fund.
- Progress inspections: Throughout the construction process, the lender will require staged inspections before releasing each draw. These inspections verify that the work completed aligns with the submitted schedule and budget. The appraiser or inspection professional must document each stage in detail, ensuring the project is on track.
- Final inspection: Once construction is complete, a final inspection is performed to confirm that the project meets the original scope and complies with Ontario Building Code requirements. The appraiser’s report must validate that the build is finished and ready for occupancy, which is a prerequisite for final draw release or refinancing.
Finding a Reputable Home Builder in Ontario
Choosing the right builder is just as critical as securing financing. A reputable builder with experience in custom homes or construction projects can make or break your build. Lenders often evaluate the builder’s credentials and track record as part of the approval process.
Why Experience Matters
- Experienced builders can help avoid cost overruns and delays
- They understand permit requirements and construction milestones
- Reputable builders reduce lender concerns and increase your chances of approval
Tips for Finding a Reputable Builder in Ontario
- Check Tarion registration: Use the Tarion Builder Directory to confirm if your builder is registered and in good standing
- Ask for references and past project photos: A reliable builder should have a portfolio and contactable references
- Search reviews on Google, HomeStars, and Houzz: These platforms highlight verified client feedback
- Verify insurance and WSIB coverage: A properly insured builder protects both parties from liability
- Look for industry affiliations: Membership in organizations like the Ontario Home Builders’ Association (OHBA) can indicate professionalism
Key takeaway: Working with a trusted, experienced builder not only ensures a smoother construction process—it may also improve your financing terms.
Key Requirements for Approval
Equity or Down Payment
Most lenders require:
- 25% to 35% equity in land or construction value
- Recent appraisal and budget breakdown
Building Permits and Zoning
You must provide:
- City-approved building permits
- Site plan and zoning compliance
Common mistake: Starting construction without permits can delay funding and approval.
Tarion Registration and Insurance
Required for:
- Registered builders
- Projects that may be resold within 7 years of completion
Important to note: Owner-built homes may not need Tarion, but you must prove you’re not in the business of selling homes.
Step-by-Step: Getting Approved in Ontario
1. Initial Consultation and Application
- Speak with a mortgage broker
- Discuss your timeline, budget, and project scope
2. Review of Budget, Plans, and Permits
Lenders will want to see:
- Construction drawings
- Permits and schedule
- Detailed budget and builder resume
3. Appraisal and Financing Offer
- “As-is” and “as-completed” appraisal
- Loan amount, interest rate, and terms confirmed
Costs, Rates, and Fees
What Private Lenders Typically Charge
- Interest rates: 8%–14% (interest-only)
- Lender/broker fees: 2%–4%
- Term: 6–12 months (with option to renew)
Legal, Appraisal, and Administrative Fees
- Appraisals: $400–$1,000 per inspection
- Legal fees: $1,500–$2,500
- Title insurance and permit check costs
Key takeaway: Construction mortgage fees are higher than traditional mortgages due to increased lender risk.
Common Myths About Construction Mortgages
“Only Big Developers Get Approved”
False. Many private lenders focus on owner-builders and small-scale projects.
“You Need a Bank to Finance Your Build”
Also false. Private lender construction mortgages are faster and more flexible than traditional banks.
Key Takeaways for Borrowers in Ontario
- Private lenders provide access to funding when banks say no
- Draws are based on work completed, not upfront
- Permits, plans, and inspections are non-negotiable
- Costs are higher, but approvals are faster and more flexible
Conclusion: Private Construction Mortgages
Private lender construction mortgages in Ontario offer a flexible and accessible way to finance your home build, especially when traditional lenders say no. While the process includes multiple stages and costs, the speed of approval and adaptability of private lenders make them a strong choice for many homeowners and builders. With the right permits, builder, and planning, your custom build can move forward with confidence.
FAQ Section
Q: Can I get a private lender construction mortgage without a Tarion warranty?
A: Yes, especially if you’re building for personal use and not resale. But some lenders may still ask for documentation to confirm your intent.
Q: How long does approval take?
A: Most private lenders approve within 3–7 business days once all documents are received.
Q: What if I run out of funds mid-construction?
A: Communicate with your lender. They may offer a top-up or re-evaluate if equity allows.
Q: Do I need to own the land already?
A: Yes. Land ownership or purchase must be included in the financing structure.
Q: Can I refinance into a traditional mortgage after construction?
A: Absolutely. Once construction is complete, you can refinance at a lower rate with a bank or credit union.
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