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Construction Mortgages in Ontario: How the Draws Work, What the Bank Wants, and Where People Get Stuck
Costs and financing Construction mortgage From a builder
Construction Mortgages in Ontario: How the Draws Work, What the Bank Wants, and Where People Get Stuck
I am not a mortgage broker. I am the person on the other end of the draw, waiting for the bank’s inspector so I can pay the crew. After a few hundred of those, here is how the money actually moves, and the three places where it stops moving.
Short version: A construction mortgage (a draw mortgage or progress-draw mortgage) pays out in stages as the house goes up: typically a land or foundation draw, lock-up, drywall, and completion, each released after the lender’s appraiser confirms the stage. You pay interest only on what has been drawn until the house is done, then it converts to a regular mortgage. Lenders usually want 20 to 25 percent of the total project cost (land plus build) in equity, a fixed-price contract or a detailed budget, plans, a permit, and a licensed builder. The holdback and the gap between what the bank releases and what the builder is owed are the two things that surprise people.
How a construction mortgage pays out
The bank does not hand over the money on day one. It approves a total, then releases it in draws tied to progress. A common schedule in Ontario:
| Draw | Released when | Typical share |
|---|---|---|
| Land / foundation | Foundation in, backfilled, often after the land purchase | 15 to 25 percent |
| Lock-up | Framed, roofed, windows and exterior doors in, siding or wrap on | 25 to 35 percent |
| Drywall / rough-ins | Plumbing, electrical and HVAC roughed in and inspected, insulation and drywall done | 20 to 30 percent |
| Completion | Occupancy permit, finishes in, final appraisal | 15 to 25 percent |
Before each draw the lender sends an appraiser or inspector to confirm the percentage complete, then releases money against that percentage, less the holdback. The builder has already paid for the materials and labour in that stage, which is why builders invoice at stage ends and why deposits exist. Construction contract deposits in Ontario explains what a reasonable deposit looks like.
What the lender wants before it says yes
- Equity: usually 20 to 25 percent of the total cost (land plus construction). The land you already own counts as equity at its appraised value. A few lenders offer insured construction financing with less down; ask a broker who does construction, not just resale.
- Income that passes the stress test on the full mortgage amount at the qualifying rate, the same as any mortgage.
- A fixed-price construction contract from a licensed builder, or for owner-builders a detailed budget with quotes. Fixed price vs cost plus matters here: banks like fixed.
- Plans and specifications, the building permit (or proof it is applied for), and an appraisal of the finished value.
- Tarion enrolment or the owner-builder exemption, and the builder’s HCRA licence. Check the licence before the bank does.
- Proof the lot is serviceable: well and septic approvals or municipal connections, since the appraiser needs a finished house to value.
Interest, payments and the conversion
During construction you pay interest only, on the amount drawn, at a construction rate that is usually a little above a regular mortgage rate. A six-month build with $400,000 drawn progressively costs a few thousand dollars in interest, not a mortgage payment every month. When the house is complete and the final draw goes out, the loan converts to the regular mortgage you were approved for. Some lenders do this in one package with one set of fees; some treat it as two loans. Ask which, because two closings cost real money.
If you are selling a house to fund the build, the lender will want the sale to close before or at a specific draw, or will count the existing mortgage payment against you. Sell first or build first walks through the timing.
The three places money gets stuck
The holdback. The Construction Act requires 10 percent of each payment to be held back until the lien period runs out after substantial completion. The bank honours that, so the builder sees 90 percent of each draw and the last 10 percent weeks later. Good builders price for it; new owner-builders are surprised by it. Construction holdback in Ontario has the mechanics.
The appraisal gap. The appraiser values percent complete, not invoices paid. Upgrades you added mid-build, site work the bank did not budget, and a foundation that cost more than the plan said all land in the gap between what the builder is owed and what the bank releases. The gap comes out of your pocket, which is why the contingency is not optional.
Timing. An inspector who comes Thursday for a stage finished Monday means a crew waiting for a week. Give the lender notice early, and have the builder keep photographs and inspection reports ready so the appraiser is in and out.
Owner-builders and the bank
If you are your own general contractor, expect a tougher conversation. Most lenders want a licensed builder on the contract; some will finance an owner-build with a larger equity position and a detailed budget, and will want proof of experience. The honest path is often a builder for the shell (foundation to lock-up) under a fixed-price contract the bank likes, and you finishing the interior with your own money and trades. Being your own GC covers the rest of that job.
Related guides on this site
Sources and further reading
Questions people ask
How much down payment do you need for a construction mortgage in Ontario?
Most lenders want 20 to 25 percent of the total project cost (land plus build) as equity. Land you already own counts at appraised value. Some lenders offer insured construction financing with less, through a broker who specializes in construction.
How do construction mortgage draws work?
The lender releases money in stages, commonly foundation, lock-up, drywall and completion, after its appraiser confirms the stage is done. Each draw is reduced by the 10 percent lien holdback. You pay interest only on the drawn amount until completion, when the loan converts to a regular mortgage.
Do I pay a mortgage payment during construction?
Only interest, on what has been drawn so far, until the house is complete. The regular principal-and-interest payments start when the construction loan converts.
Can I get a construction mortgage as an owner-builder?
Sometimes, with more equity, a detailed budget and proof you can manage the build. Many lenders want a licensed builder on at least the shell. A broker who does construction financing regularly will know which lenders are open to it.
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Reviewed and updated October 2026. Costs are Ontario ranges, not quotes; code references are to the Ontario Building Code in force at that date.
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