Construction Mortgages and the Draw Schedule — How Self-Builds Get Funded in Canada

Construction mortgages disburse in tranches — most lenders use three to five draws, though CMHC's Progress Advance program formally supports up to six. Each draw is triggered by a construction milestone: typically (1) foundation complete, (2) framing and roof sheathed, (3) mechanical rough-in (plumbing, HVAC, electrical), (4) drywall and interior finishes, and (5) substantial completion. Before each advance, the lender orders an inspection — either through CMHC's network or an approved independent inspector — who certifies the percentage of work complete. The lender advances funds up to the certified percentage of the total approved loan. No draw is released without an inspection certificate. The borrower pays interest only on the cumulative drawn balance between advances; full amortizing payments begin after the final draw and the mortgage converts to a standard term.

CMHC insures construction mortgages under its Progress Advance program, which mirrors standard insured underwriting with one key difference: the loan-to-value is calculated against the as-completed appraised value, not the land value or cost-to-date. This allows borrowers with land equity to treat that equity as part of their down payment. Minimum 5% down applies on the first $500,000 of completed value and 10% on the portion between $500,000 and $1,500,000 (the December 2024 cap increase). Premium tiers are identical to standard insured: 4.00% at 90–95% LTV, 3.10% at 85–90%, 2.80% at 80–85%. Sagen and Canada Guaranty offer equivalent programs. The insured route caps the mortgage at $1,500,000 completed value; above that, conventional construction financing applies with a minimum 20% down.

For builds where the completed value exceeds $1,500,000, or where the borrower prefers to avoid the insurance premium, conventional construction mortgages require a minimum 20% equity position based on the as-completed appraisal. Most Schedule A banks and credit unions offer this product; monoline lenders are less common in the construction space because of the operational complexity of draw management. Rate pricing on conventional construction mortgages typically runs 25–50 bps above the equivalent term on a standard purchase mortgage, reflecting the lender's construction-period risk. Some lenders charge a construction administration fee of $500–$1,500 to cover inspection coordination. The rate is usually locked for the construction period (6–18 months) and then converts to a standard term at the prevailing rate at conversion — rate-lock-at-conversion provisions vary significantly by lender and should be negotiated explicitly.

The interest-only carry period is the most underestimated cost in construction financing. As each draw is advanced, the interest obligation steps up. On a $889,200 mortgage at 5.25%, the monthly interest on the full advance is approximately $3,888 — but the borrower is also typically paying rent or carrying an existing property during construction. Model the worst-case carry scenario: assume the build runs 20% over schedule (common) and calculate the total interest cost at full advance for that extended period. A 6-month build that extends to 9 months adds roughly $11,664 in carry interest at the above example rate. Most lenders allow the construction period to run 12–18 months before requiring conversion; extensions beyond that require lender approval and sometimes a fee.

Qualification follows OSFI B-20 stress-test rules: the qualifying rate is the greater of the contract rate plus 200 bps or 5.25% (the current floor as of 2026). GDS and TDS ratios are calculated on the fully amortized payment at the converted term, not the interest-only carry payment — this is the correct approach and means qualification is based on the permanent debt service. Required documentation beyond standard income verification includes: fixed-price construction contract (open-cost contracts are harder to insure), builder credentials (provincial licensing, GST/HST registration, Tarion or equivalent new-home warranty enrollment in applicable provinces), as-completed appraisal from a lender-approved appraiser, building permit, and site plans or architectural drawings. Owner-builder files (no licensed GC) face additional scrutiny — most insured lenders require the borrower to demonstrate construction management experience or hire a project manager.

The construction period rate and the converted permanent mortgage rate are two separate decisions. Some lenders offer a rate hold at application that locks the permanent rate for the full construction period — typically at a 10–20 bps premium over the standard rate hold. Given the 2025–2026 rate environment (5-year fixed roughly 5.00–5.50%), locking the permanent rate at application provides certainty but costs a small premium. The alternative — floating to conversion and taking the market rate — is a reasonable bet if the BoC overnight rate (currently ~2.75%) continues its easing trajectory, but introduces rate risk over a 12–18 month build window. Borrowers who cannot absorb a 75–100 bps adverse rate move should lock at application. Confirm whether the lender's rate hold survives a draw extension request — some lenders reset the rate hold clock on extensions.