What You Need to Know About Construction Loans for Luxury Custom Homes in Vancouver

Looking to have your dream home built but can’t cover the costs out of pocket? You’re not alone. With the average cost of new-build luxury custom homes in Vancouver approaching $1.75, there aren’t many families that can afford to absorb the full cost of land and construction – but they can finance their dream home.

What is a Construction Loan?

Conventional mortgages are for purchasing an existing home; the bank lending money holds an interest in your home as collateral until the loan is paid in full. But what happens when there is no structure?

A construction loan (sometimes called a construction mortgage) is a specialty lending product designed to bridge the financing gap between the construction and completion of your new home. These loans generally have a one-year amortization period, after which the loan is either paid in full or rolled into a mortgage. Homebuyers need to be aware that the interest rates on construction loans are higher than with conventional mortgage products. They will also require detailed construction plans from your home builder in addition to the standard personal financials necessary for loan approvals. The maximum loan amount for a construction mortgage is typically 75% of the value of land and construction costs; buyers will be responsible for the remaining balance.

How Do Construction Loans Work?

Unlike a traditional mortgage, which is usually paid in a lump sum, construction loans are paid in draws at pre-determined construction milestones.

Different lenders will have different policies on how they pay out these draws. In some cases, your lawyer might distribute the money; in other cases, your lender may choose to work directly with your custom home builder.

A standard construction loan schedule includes up to 5 draws if you already own the land and six if you’re also financing land costs. Many lenders have pre-existing schedules for these draws, usually based on specific milestones. An example would be:

• Draw one: land costs
• Draw two: foundation completion
• Draw three: roof completion
• Draw four: plumbing and electrical
• Draw five: finished interior
• Last draw: when construction is done

Other lenders may use a similar schedule but based on the percentage of the total project completed.

In some cases, your custom home builder might propose an alternative schedule, but your bank or lender would have final approval.

Cost of a Luxury Custom Home in Vancouver

This is often the first question clients have when considering a new build, and unfortunately, there is no perfect answer. The cost of luxury home building can vary dramatically based on whether you are using a stock home design or going full custom. The size, location, and finishes will also impact your cost per square foot.

On the low end, assuming you are using stock plans for your builder and not making any significant changes, new home construction can range from $150 to $300 a square foot; custom-designed homes, on the other hand, can climb as high as $700 to over a thousand per square foot.

Repaying your Construction Loan

While your home is under construction, you will be required to make payments on your loan. This, too, will vary by lender. In some cases, you may be paying down the principal and interest; in others, you only need to make interest payments.

Once the construction of your new luxury custom home is done and the builders paid, you have a few options on what to do with the balance of your construction loan. Many home buyers choose to refinance the balance into their mortgage on the new property; however, if you are financially able to, you can also choose to pay off the remaining loan amount.