Construction Mortgage Insurance Requirements: What the Lender Wants Before the First Draw

Construction Insurance

Construction Mortgage Insurance Requirements: What the Lender Wants Before the First Draw

A construction mortgage pays out in pieces, and before the first piece moves the lender’s lawyer wants one document more than any other: proof that the house is insured for its full completed value with the lender’s name on the policy. This page is what the lender asks for, why the bank and the broker disagree on the amount, and how the term has to fit the draw schedule.

Ontario lender practice and published figures, checked November 2026, before the 8 percent Ontario sales tax on property insurance. Lender terms vary; read your own commitment letter.

No Proof of Insurance, No First Advance

A construction mortgage is advanced in five to seven draws, each after an inspector confirms the stage is done. The money moves through the lender’s lawyer, who follows written solicitor instructions. One major bank’s instructions tell the lawyer to obtain evidence of insurance on the property under construction, a builder’s risk policy when a builder is building or a course-of-construction policy when the client is, at the full appraised completion value of the project.

So a lender will not advance a draw without proof of insurance naming the lender. The other conditions ride alongside: in Ontario the lawyer holds back 10 percent of each advance until the lien period runs out, the foundation is often required within 180 days of the first draw, and interest runs on the advanced balance only.

Where homeowners go wrong is timing. They bind the policy the week the lawyer asks, which is the week the excavator is already booked. Bind it the day the commitment comes in, with the start date set to the first delivery. The draw schedule page walks the stages and inspections; the construction financing page covers the loan itself.

Mortgagee Clause and Loss Payee, in Plain Words

The lender has lent money against a house that is not there yet. If it burns, the lender wants the insurance cheque to pay down the loan, not to disappear into a new truck. The mortgagee clause does that: it names the lender on the policy, a claim cheque becomes payable jointly to you and the lender, the lender gets notice before cancellation, and under the standard mortgage clause used in Canada the lender’s right to be paid survives some mistakes by the insured. Loss payee is the broader label for anyone with a financial interest who gets paid first.

What the lawyer receives is a certificate or binder from the brokerage showing the insured name, the property, the insured amount, the term, and the lender’s exact legal name and address as mortgagee. Copy the legal name from the commitment letter; a certificate with the wrong branch or a missing “Inc.” is the kind of thing a lawyer sends back while the foundation crew sits. The builder’s own policy does not do this job on your lot with your mortgage; the who pays page covers that split.

The Bank Says One Number, the Broker Says Another

This argument stalls more approvals than anything else, and both sides are right about their own job. The broker insures the rebuild: hard construction cost, labour and materials, land excluded, because that is what a fire can destroy. The lender’s instructions say full appraised completion value, which often includes soft costs and sometimes a margin above cost. The two rarely match.

Insured amount0.5 / 0.9 / 1.5 percentTop of the published range, 4 percent
Broker’s number: $700,000 hard cost, labour and materials, land excluded$3,500 / $6,300 / $10,500$28,000
Lender’s number: $800,000 appraised completion value excluding land$4,000 / $7,200 / $12,000$32,000
Difference for the extra $100,000$500 / $900 / $1,500$4,000

November 2026. The 0.5, 0.9 and 1.5 percent figures are our planning numbers inside the published range (9 to 12 month build by a licensed builder, protected area, $2,500 deductible). The 4 percent column is the top of the range two Ontario brokerages and a Canadian comparison site publish; it is not our estimate.

Why insurance prices are all over the map: the lender and the broker are not the only ones who disagree. The brokerages, insurers’ guides and lenders we checked did not agree on the premium either: an Ontario and Quebec brokerage and a Canadian renovation marketplace said 0.5 to 1 percent of rebuild value; two Ontario brokerages and a Canadian comparison site said 1 percent up to 4. On a $500,000 house that is $2,500 at one end and $20,000 at the other. The gap comes from percent of hard cost versus a flat minimum, term, deductible, construction type, fire protection grade, and soft costs and liability in or out. Budget about 1 percent, roughly $4,500 on $500,000, and get three quotes on the same written description of the build.

How to reconcile it: insure to the lender’s number. The extra premium in the middle column is $900 on this house, cheaper than a week of delay. Ask for the insured amount to be written as the appraised completion value excluding land, with the soft-cost endorsement added if the lender’s figure includes design, permits and interest.

The Term Has to Outlast the Draw Schedule

Builder’s risk policies are written for 3, 6, 9 or 12 months. Construction mortgages put a clock on completion too; one bank’s is 15 months from the first advance, after which the loan converts to a regular mortgage. A nine-month policy on a twelve-month build expires with the drywall half hung, and the lawyer will not release the next draw against an expired certificate. Usually one extension is granted, at additional premium, if you ask before expiry; a lapsed policy is a new application.

  1. Term equals the schedule plus two months. Winter in Simcoe County is not a surprise; price it in.
  2. Extension request at the 75 percent mark. If the roof is not on by then, call the brokerage that week.
  3. Renewal certificate to the lawyer before expiry. The file needs it before the next advance, not with it.
  4. Convert before you move in. Builder’s risk ends at occupancy or completion, whichever comes first; the home policy starts that same day. The builder’s risk versus home insurance page covers the switch.

Changing lenders mid-build means a new mortgagee clause: a simple endorsement, but the old lender’s name stays on the policy until you ask, so ask, and ask whether there is a charge. Budget increases work the same way. A change order that adds $80,000 of kitchen and windows adds $80,000 of exposure the policy does not know about; tell the brokerage and the lender, and expect the premium to go up pro rata for the time left on the term.

Soft Costs and the Interest Clock After a Loss

A standard builder’s risk policy pays to rebuild what burned. It does not pay the extra interest you carry on the construction loan for the six months the rebuild takes, or the second round of permit fees. Those are soft costs, and most plans do not cover them unless they are specifically added.

A soft-cost endorsement adds them to a stated sublimit, and our assumption for the calculator is that it adds 5 to 15 percent to the premium: on a $4,500 middle-of-the-range premium, roughly $225 to $675 more. On a financed build, where the interest clock does not stop for a fire, it is cheap cover. Do not wait for the lender’s letter to ask for it; the lender is not the one paying the interest.

Two more lender facts. A mortgage insurer’s new-construction rules require a new home warranty, and for an owner-built home, which Tarion does not cover, an occupancy permit or a qualified professional’s report instead. And a factory-built home’s final advance waits until the home is affixed to the foundation; the ICF, log, SIP and modular page covers who insures the modules until then.

What the Lender’s Letter Typically Lists

  • Builder’s risk or course-of-construction policy, all-risk form, covering the property under construction.
  • Insured amount at the full appraised completion value of the project, excluding land.
  • The lender named as mortgagee, with its exact legal name and address as shown in the commitment letter.
  • Policy term covering the construction period, with evidence of renewal delivered before any expiry.
  • Certificate or binder delivered to the lender’s lawyer before the first advance.
  • On completion, a homeowner policy at replacement cost with the lender as mortgagee, in place before the loan converts.

If the construction loan is from a credit union or a private lender, expect the same list in different words and ask for it in writing early. If the premium was not in your spreadsheet, the calculator fixes that in ten minutes.

We build houses and carry builder’s risk, liability and WSIB on every one of them; we do not sell insurance, we do not name or refer brokers or insurers, and we take no fee from anyone in that business. The binding answer on any policy comes from a RIBO-licensed broker. In plain words, this is general information from a builder, not insurance, legal or tax advice; policies and commitment letters differ; confirm the details with a RIBO-licensed broker and your lender before you count on them.

Questions people ask

Do Ontario construction mortgages require builder’s risk insurance?

In practice, yes. No Ontario law requires the policy, but a major bank’s solicitor instructions require evidence of builder’s risk or course-of-construction insurance at the full appraised completion value, with the lender named, before the first advance. No evidence, no draw.

What is a mortgagee clause in builder’s risk insurance?

An endorsement naming the lender on the policy as mortgagee. A claim cheque becomes payable jointly to you and the lender, the lender gets notice before cancellation, and the lender’s right to payment survives some errors by the insured. Copy its legal name exactly.

Will a bank accept the builder’s insurance instead of the homeowner’s?

On a spec home the builder owns, yes, because the builder is the borrower. On your lot with your mortgage, the lender wants a policy in your name with itself as mortgagee, or at least you and the lender named on the builder’s policy with the mortgagee clause in place.

Does builder’s risk insurance cover loan interest after a construction loss?

Not on a standard form. Extra interest, repeat permit fees and rent during a rebuild are soft costs, excluded unless a soft-cost endorsement is added to a stated limit. Our assumption is that the endorsement adds 5 to 15 percent to the premium, roughly $225 to $675 on a $4,500 premium.

What happens if builder’s risk insurance expires before the final mortgage draw?

The lawyer will not advance against an expired certificate, so the draw stops until coverage is renewed or extended. Usually one extension is granted at additional premium if you ask before expiry; after expiry it becomes a new application. Buy a term that matches your schedule plus two months and diary the date.

Get the certificate into the lawyer’s file before the excavator is booked

The calculator prices the policy from your hard cost, term and site, lets you insure to the lender’s completion value, and writes the quote request sheet. The hub has the free “Am I Covered” booklet and the paid coverage review with a builder.

Price my coverageBack to the insurance hub

Sources and further reading