A construction mortgage releases money in stages as an inspector confirms each phase of a build is finished, not as one lump sum at closing the way a mortgage on a resale home works. You pay interest only on the amount drawn so far, put down more than you would on a standard purchase, and once the building passes its final inspection, the loan converts into a regular mortgage with regular amortization. That shape is what makes it the financing route behind a custom new build, and behind several of the housing types this site already covers: a laneway house, a garden suite, or a multiplex conversion. For everything else a Toronto purchase involves, see our complete Toronto real estate guide.
If you’ve read our guides to garden suites, laneway houses or multiplexes and know roughly what you’re allowed to build, this guide covers the financing mechanics behind building it. It isn’t the only route: an existing homeowner adding a secondary suite to a house they already own usually reaches for the CMHC-insured refinance covered in our guide to paying for a secondary suite instead, since that borrows against equity you already have rather than building new. Once you’ve worked out how you’re paying for it, browse current Toronto listings or see the rest of our guides for everything else a build or purchase involves.
What a construction mortgage is
A standard mortgage hands over the full loan amount at closing, because the lender is buying an asset that already exists. A construction mortgage, sometimes called a draw mortgage, can’t work that way, because the asset the lender is securing the loan against doesn’t exist yet. Instead, the lender releases the money in instalments as the building progresses, matched to the state of construction rather than to a calendar schedule. If a project stalls or a builder falls behind, the next draw simply doesn’t go out until the work catches up.
This structure protects the lender from financing a project that never gets finished, and it protects the borrower from drawing down the full loan amount against a half-built structure. It’s the same basic idea whether you’re financing a full custom home on a lot you bought specifically to build on, a laneway house in your existing backyard, a garden suite, or a multiplex conversion of an existing building. The scale of the project changes the numbers. The draw structure itself doesn’t.
How draws are verified and released
Before a draw is advanced, a lender sends an inspector or appraiser to the site to confirm the stage that draw is tied to is complete, not just underway. Canada Guaranty’s own lender guidance on progress draws describes this explicitly as a verification step the insurer requires before a lender can advance funds, and the borrower generally covers the cost of each inspection, sometimes deducted directly from the draw itself. A project that’s behind schedule or over budget on an earlier stage doesn’t get the next instalment until an inspector confirms the work genuinely matches what that stage requires.
How many draws a project goes through, and exactly what each one is tied to, varies by lender and by the size of the project. A smaller renovation-scale build might see as few as three, while a larger custom home can run to five or more. What’s consistent across lenders is the shape, not the count: an early draw tied to excavation and the foundation being in, a middle stage once the frame is up and the building is weatherproofed, sometimes a lock-up stage once windows and doors are in, and a final draw once the building passes its last inspection. LendCity’s own construction-mortgage guide describes a comparable four-stage pattern. Treat any site that names one fixed universal number of draws as describing its own typical practice, not a rule every lender follows.
What’s different about the terms during construction
Expect to put down more than you would on a standard purchase. Across lender and broker sources, the figure commonly cited sits somewhere between 20% and 30% of the total project cost, land plus construction, and the exact number depends on the lender, your credit, and the project itself. There’s no single figure every lender applies, and a site that quotes one precise percentage as universal is simplifying more than the market allows.
While the building is underway, you typically pay interest only on the portion that’s been drawn, not on the full approved loan amount sitting unused. That keeps your carrying cost lower during construction than it would be if interest accrued on money you haven’t received yet, but it also means your payment rises as each draw goes out, since more of the loan is now outstanding. The rate itself during the construction phase is generally higher than you’d get on a standard mortgage, reflecting the lender’s added risk in financing a building that doesn’t exist yet rather than one already standing and appraised.
What happens once the build is finished
Once the building passes its final inspection and gets its occupancy permit, the construction mortgage converts into a conventional mortgage. At that point, the usual rules apply again: a standard amortization schedule, principal and interest payments on the full balance, and the ability to shop your rate at renewal the same as any other mortgage holder. Some lenders convert the construction loan automatically into their own standard product; others expect you to arrange a separate mortgage at completion, so it’s worth confirming which applies before you sign the original construction financing, not after the building is done.
How this differs from the secondary-suite refinance
It’s easy to conflate a construction mortgage with the CMHC-insured refinance covered in our guide to paying for a secondary suite, since both ultimately fund the same kind of project: a laneway house, a garden suite, a basement apartment, a multiplex conversion. They solve a different starting problem, though. The refinance is for someone who already owns a home with equity in it, and borrows against the suite’s added future value to pay for building it. A construction mortgage doesn’t assume you have existing equity to draw against at all. It’s the route for financing a build on a lot you’re buying or already own outright, where there’s no existing mortgage to refinance in the first place, or for a custom home that’s larger than a refinance alone would cover. Neither one is better in general. Which applies depends on whether you’re borrowing against a home you already hold, or financing something closer to a ground-up build.
What a lender wants to see before approving one
Before approving a construction mortgage, a lender generally wants a signed contract with a licensed builder, a detailed cost breakdown or quote covering the full scope of the work, and either permits already in hand or clear evidence they’re in progress. These aren’t exhaustive underwriting requirements, since every lender’s own checklist differs, but they’re the baseline documentation that turns “we’re planning to build” into something a lender can underwrite. Arranging this with a lender before you’ve locked in a builder, rather than after, tends to save real time, since a lender can flag gaps in your documentation while you still have room to fix them.
Frequently asked questions
What is a construction mortgage and how is it different from a regular mortgage?
A regular mortgage pays out the full loan amount in one payment at closing, because it’s financing a home that already exists. A construction mortgage pays out in stages, called draws, as an inspector confirms each phase of the build is finished, because the home being financed doesn’t exist yet and the lender needs proof the money is being spent on real progress before releasing more. Once the building passes its final inspection, the loan converts into a conventional mortgage and behaves like any other mortgage from that point forward, with standard amortization and the ability to shop your rate at renewal.
How many draws are there, and how does the lender decide when to release one?
The number of draws varies by lender and by the size of the project, commonly somewhere between three and five, and there’s no single number every lender uses. What stays consistent is the method: before each draw goes out, the lender sends an inspector or appraiser to confirm that stage of construction is genuinely complete, not just underway. A project that falls behind on an earlier stage simply doesn’t receive its next draw until the work catches up, which is the mechanism that protects the lender from funding a project that stalls partway through.
Do I need a bigger down payment for a construction mortgage?
Generally, yes. Lender and broker sources commonly cite a range between 20% and 30% of the total project cost, covering both land and construction, higher than what a standard resale purchase typically requires. The exact figure depends on the lender, your credit profile, and the specifics of the project, so there’s no single percentage that applies everywhere. During construction, you typically pay interest only on the portion of the loan that’s been drawn so far, rather than on the full approved amount, which keeps carrying costs lower in the earlier stages before later draws go out.
What happens to a construction mortgage once the building is finished?
Once the building passes its final inspection and receives an occupancy permit, the construction mortgage converts into a standard mortgage, with a regular amortization schedule and principal-and-interest payments on the full balance going forward. Some lenders convert the loan into their own standard mortgage product automatically at that point; others expect the borrower to arrange a separate mortgage once the build is complete. It’s worth confirming which approach your lender takes before signing the original construction financing, since that affects what you need to arrange, and when, as the project nears completion.
Is a construction mortgage the same as the CMHC-insured refinance for a secondary suite?
No, even though both can fund the same kinds of projects, like a laneway house or a garden suite. The CMHC-insured refinance covered in our guide to paying for a secondary suite is for someone who already owns a home with equity in it, and borrows against the suite’s added future value to pay for building it. A construction mortgage doesn’t assume you have existing home equity at all. It’s the route for financing a build on a lot you’re buying or already own outright, where there’s no existing mortgage to refinance against, including a full custom home that’s larger in scope than a refinance alone would typically cover.
Once you know how a construction mortgage works, the next step is confirming what you’re allowed to build in the first place. See our guides to laneway houses, garden suites and multiplexes for the zoning and permit side, and our guide to paying for a secondary suite if you’re borrowing against a home you already own rather than building new. Browse current Toronto listings if you’re still looking for the lot or property to build on, or see the rest of our guides for everything else a Toronto purchase or build involves.