Why banks say no to builds
Most banks will not lend against a property that is not yet livable or does not have a finished appraisal comparable. A half built house in Etobicoke or a gutted semi in Leslieville does not fit their risk models, no matter how strong your income is. Private lenders instead look at the finished value and the builder's plan, which lets them fund a project banks would decline outright.
How draw mortgages work
Private construction loans are usually released in stages tied to progress, sometimes called draws. Money is advanced as framing, roofing, plumbing and finishing milestones are completed and inspected. This protects the lender and keeps the borrower from receiving a lump sum before the work justifies it.
- Initial advance at land or purchase closing
- Progress draws tied to inspections
- Final draw at substantial completion
Costs to expect
Private construction money costs more than a conventional mortgage because the lender is taking on more uncertainty. Expect higher rates, lender fees and possible inspection charges for each draw. It is still often cheaper than delaying a project for months waiting on bank approval, especially if trades and permits are already lined up.
Exit strategy matters most
Every private construction file needs a clear exit, meaning a plan to pay the loan off once the build is done. That usually means refinancing into a conventional mortgage once the home is appraised at its completed value, or selling the finished property. Lenders want to see this plan before they will fund anything.
Frequently asked questions
- Can I get private construction financing for a laneway house in Toronto?
- Yes, many private lenders will fund laneway suites and garden suites since they add value to an existing lot, though the loan is usually secured against the whole property.
- Do I need a licensed builder to qualify?
- Most lenders prefer a licensed general contractor or at least a detailed scope of work and budget, since it lowers the chance of the project stalling.
- How long do construction loans usually run?
- Terms are typically six months to two years, long enough to complete the build and arrange permanent financing afterward.