Financing a home you are building works differently from buying an existing one. A construction loan (or construction mortgage) pays out in stages as the house goes up, comes with closer lender oversight and has stricter requirements than a standard mortgage. This page explains how construction loans work, what you need to qualify and how the draw schedule runs from foundation to completion. It is part of our guide to mortgage types and features; finding a lot, permits, choosing a builder and the build timeline are covered in buying land and building a house.
What Is a Construction Loan?
A construction loan is a short-term loan used to finance building a new home. Unlike a standard mortgage, where you receive the full amount at closing, a construction loan releases funds in stages (called draws) as construction progresses. During the build you usually pay interest only on the amount drawn so far. Once the house is finished, the loan either converts to a permanent mortgage or is paid off with a separate mortgage.
Construction loans are riskier for lenders because they are lending against a property that doesn’t exist yet, which is why they come with stricter qualification, higher rates and more oversight.
Types of Construction Loans
Construction-to-permanent (single close). The construction loan and the permanent mortgage are one product. You close once, build, and on completion the loan converts to a regular mortgage. It is the simplest option and saves a second set of closing costs.
Standalone construction loan. A separate short-term loan for the construction period only. On completion, you arrange a new mortgage to pay it off. That means two sets of closing costs, but more choice for the permanent mortgage.
Construction Loan vs Regular Mortgage
| Feature | Construction Loan | Regular Mortgage |
|---|---|---|
| Disbursement | In stages (draws) | Full amount at closing |
| Interest payments | Interest-only on the drawn amount during construction | Principal and interest from day one |
| Term | 6-18 months (the construction period) | 1-10 years (typically 5) |
| Interest rate | Usually prime plus a margin | Posted or discounted fixed or variable rates |
| Down payment | Often 20-25%+ of the total project cost if uninsured (see insured construction below) | Set by the purchase price |
| Appraisal | Based on the completed value (as-if-complete appraisal) | Based on current market value |
| Lender oversight | Draw inspections at each milestone | Minimal after closing |
| Qualification | Stricter (detailed plans and a builder contract required) | Standard income and credit requirements |
How Draws Work
The draw schedule is the backbone of a construction loan. The lender releases funds at set milestones after an inspector confirms the work is done.
| Draw | Milestone | Typical % of Loan | What Must Be Complete |
|---|---|---|---|
| 1 | Foundation | 15%-20% | Excavation, foundation poured, backfill |
| 2 | Framing | 20%-25% | Structure framed, sheathed, roofed |
| 3 | Lock-up | 20%-25% | Windows, doors, exterior closed in |
| 4 | Drywall and mechanical | 15%-20% | Plumbing, electrical, HVAC, drywall hung |
| 5 | Completion | 15%-20% | Finishes complete, occupancy permit issued |
Holdback. Provincial construction lien laws generally require the owner to hold back a share of each payment (commonly 10%) until the lien period after substantial completion has passed, to protect against claims from unpaid subtrades. The holdback is released once the period expires with no liens registered.
The lender sends an inspector before each draw. If the work isn’t complete, the draw may be delayed or reduced, so it helps to have personal cash flow to cover gaps between draws.
Requirements for a Construction Loan
| Requirement | Details |
|---|---|
| Down payment | Often 20-25%+ of the total project cost (land plus construction) for an uninsured loan |
| Credit score | 680+ (some lenders 700+) |
| Income verification | Full documentation (T4s, notices of assessment, tax returns; 2 years if self-employed) |
| Detailed building plans | Architect- or designer-stamped plans and specifications |
| Builder contract | Fixed-price or cost-plus contract with a licensed builder |
| Cost breakdown | Itemized budget for all construction costs |
| Appraisal | As-if-complete appraisal by a certified appraiser |
| Building permits | Approved permits from the municipality |
| Construction timeline | Estimated completion date (many lenders want under 12 months) |
If you already own the land, its equity can count toward the down payment. For example, if you own a $200,000 lot free and clear and the total project cost is $800,000, you have the equivalent of a 25% down payment.
Insured construction financing
A smaller down payment is possible with mortgage insurance. CMHC Improvement offers insured financing up to 95% of the “as-improved” value for 1- or 2-unit owner-occupied properties, and up to 90% for 3- or 4-unit owner-occupied properties, with the down payment based on the lower of market value or purchase price or cost of construction. CMHC requires new construction financing to be approved before construction starts, or at an early stage, and the lender must have control of the entire building during the construction period. The minimum down payment tiers and the price cap are explained in CMHC mortgage rules.
Construction Loan Rates
Construction loan rates are higher than standard mortgage rates because of the extra risk and administration. They are usually quoted as the lender’s prime rate plus a margin; as of October 1, 2026, the Bank of Canada prime rate is 4.45%.
| Lender type | Pricing | Notes |
|---|---|---|
| Big 5 banks | Prime plus a margin | Selective; prefer straightforward builds with established builders |
| Credit unions | Prime plus a margin, often a little higher | More flexible; often more experienced with construction loans |
| B-lenders | Higher margins | For borrowers who don’t qualify with A-lenders |
| Private lenders | Highest | Shorter terms, higher fees |
Current mortgage rates for the permanent mortgage that follows are on our mortgage rates pages.
Lenders Who Offer Construction Loans
Construction financing is a specialized niche. Not all lenders offer it, and those that do differ in experience and flexibility.
Big 5 banks (RBC, TD, BMO, Scotiabank, CIBC) offer construction loans but tend to be conservative, preferring established builders, straightforward designs and strong borrower profiles. Turnaround can be slower.
Credit unions such as Meridian, Coast Capital, Servus and Libro often have more experience with custom builds, more flexible underwriting and local market knowledge.
B-lenders like Home Trust and Equitable Bank serve borrowers who don’t meet A-lender criteria, at higher rates and fees.
Mortgage brokers have access to several lenders and know which ones are active in construction lending.
Construction Budget Breakdown
A realistic budget is needed for loan approval and for avoiding overruns.
| Category | Typical % of Total | Notes |
|---|---|---|
| Land | 25%-40% | Varies dramatically by location |
| Site preparation | 3%-5% | Excavation, grading, tree removal, servicing |
| Foundation | 8%-12% | Concrete, waterproofing, drainage |
| Framing and structure | 15%-20% | Lumber, trusses, sheathing, labour |
| Roofing | 3%-5% | Materials and installation |
| Exterior (windows, doors, siding) | 8%-12% | Energy-efficient windows add cost |
| Mechanical (HVAC, plumbing, electrical) | 12%-15% | Includes hookups and permits |
| Insulation and drywall | 5%-7% | Spray foam costs more than batt |
| Interior finishes | 10%-15% | Flooring, cabinetry, countertops, fixtures |
| Landscaping and driveway | 3%-5% | Often underbudgeted |
| Permits and fees | 1%-3% | Development charges, building permits |
| Contingency | 10%-15% | Buffer for unexpected costs |
What building costs per square foot, by region and finish level, is covered in how much it costs to build a house.
Common Pitfalls
Cost overruns. The most common problem. Change orders, material price increases and unforeseen site conditions can push costs 10% to 30% above the original budget, which is what the 10% to 15% contingency is for.
Builder delays. Weather, supply problems, subtrade availability and permit delays regularly extend timelines. A 12-month build that stretches to 18 months means six more months of construction-loan interest.
Draw inspection disputes. If the lender’s inspector finds the work isn’t far enough along, a draw may be delayed, which can squeeze the builder’s cash flow. Clear communication between you, the builder and the lender helps.
Running out of contingency. Spending the contingency early on upgrades leaves no buffer for genuine surprises later.
Builder Selection and Contract Essentials
The builder is the biggest single decision in a custom build, and the lender will review the builder’s credentials too.
Look for: membership in a provincial home builders’ association, proof of liability insurance and workers’ compensation coverage, references from recent clients and a portfolio of comparable builds. Current job sites show quality and organization.
Contract essentials: a detailed scope of work, a fixed or guaranteed-maximum price, a payment schedule aligned with the lender’s draws, a written change-order process, warranty terms and a realistic completion date with consequences for unreasonable delays.
Construction Loans vs Purchase Plus Improvements
A construction loan is for building from the ground up. If you are buying an existing home and renovating it, a purchase plus improvements mortgage rolls the renovation cost into the mortgage at closing with a single holdback rather than a draw schedule.
The Bottom Line
Construction loans are more complex and usually more expensive than regular mortgages, but they are how most custom homes in Canada get built. Expect a larger down payment unless the loan is insured, a higher rate during the build and a draw process with lender inspections at each milestone. A realistic budget with a 10% to 15% contingency, an experienced builder and a lender familiar with construction financing make the process smoother.