Mortgage issues: Planning to build your dream home?

How not to let the experience turn into a nightmare

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Many Canadians choose to build custom homes with special features to suit their lifestyles and tastes. While building your own home can be a creative and exciting experience, there are a few key things to consider to avoid financial challenges. That’s where seeking the advice of expert partners, including a mortgage specialist, is the first step in making this exciting journey extraordinary.

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The key to a successful construction project is for you and your contractor to agree on a detailed plan, line item budget, and schedule in advance. Always ask for it in writing! Clearly written agreements and communication will ensure there are fewer surprises and unexpected costs.

Here are some things to keep in mind:

Make sure your lot is zoned for residential construction.

Find out if the builder/contractor is licensed and “in good standing” under BC Housing and is a member of a recognized third-party new home warranty program.

Professional builders/contractors are often members of organizations such as the Canadian Association of Home Builders.

Have a good understanding of all possible construction costs involved, including the following:

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  • Engineering or architectural plans for your home;
  • Site cleanup and demolition of existing buildings, if applicable;
  • Construction permits, and permits for wells, septic systems, hydro and gas;
  • construction insurance course;
  • Landscaping, including lawns, gardens, fences, and patios;
  • Paving of the road, including sidewalks.
  • Consider a contingency budget of at least 10 percent for cost overruns. Today, many residential contractors structure their construction contracts as “cost plus.” This means that the increased cost of materials and/or labor can be passed on to the owner.

Understanding the lender’s financing requirements, along with your contractor’s preferred payment schedule during each phase of construction, is vital. Most contractors require payments in stages, usually after the foundation is laid, when the frame is finished, after the interior is finished, and at the completion of the entire project.

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Get the funds you need

Throughout the various phases of construction, your contractor will request funds from you to complete a specific job, such as laying the foundation. At this point, most lenders will send an appraiser to inspect your home site and determine the amount of work that has been completed. The amount of the withdrawal will usually be calculated based on this inspection to ensure that the lender retains enough funds to complete your home.

It is important to note that your attorney will retain 10 percent of each draw in accordance with British Columbia Lien Law. This government requirement helps ensure that dealers and vendors are paid for work performed. As long as no liens have been filed against your property, your attorney will release this withheld amount to you 55 days after construction is complete.

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When it comes to construction mortgages, the solutions are quite varied and it is important that you do your homework here. Some lenders only offer variable rate loans during construction, while others may also offer a fixed rate commitment.

Choosing the right lender can save you and your family thousands of dollars in interest charges.

Your home is one of the largest investments you will ever make. Protect yourself by working with experienced professionals you can trust.

randy chin
RBC Regional Manager, Residential Mortgages
Follow Randy on Twitter @RBCrandychin
Instagram @rbcrandychin

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