Construction Mortgage

So you want to build a construction. Well how do you get prepared for the mortgage? 

The bank and most lenders will not calculate your project and mortgage as one lump sum and hence your construction mortgage must be broken down into two parts for each step. 

1. When you purchase your land. 

It’s unlikely that you’ll be able to purchase the land in one fell swoop entirely out of cash (or maybe you can, do you need a realtor?), so you will need a mortgage to acquire the land before you start building.

Let’s make an example out of our current real estate market:

If you were looking to purchase a 7,000 square foot lot, in the Fraser Valley area, it could cost about $1,600,000. You will need to prepared 35% downpayment in order to secure the mortgage from the bank. 

35% of $1.6 Million will be $560,000. 

Now that you’ve purchased your land, then comes phase two…

2. Building your construction

The bank will not be filing a construction loan on your behalf, ergo it’ll be up to you to provide a full breakdown of your construction in terms of cost. That includes the building and your newly purchased property.

Pulling once again from today’s market average, the building cost would be roughly $200/Sq.Ft. 

If your lot is 7,000 sq.ft in size then the buildable might be approximately 5,000 sq.ft.

$200/sq.ft x 5,000 sq.ft = $1,000,000

The $1 million construction + the $1.6 million property you already own put together would be $2.6 million. 

The bank will need 25% of down payment of $2.6 million in exchange for 75% Loan to Value. 

25% of $2.6 million will be $650,000.

Luckily, the bank will account for your earlier down payment on the land of $560,000. Meaning you only need another $90,000 for the remaining down payment. 


This concludes the mortgage aspects of your construction finances. 

HOWEVER, be warned that preparing downpayment of your construction project and land will not be enough to complete. You will absolutely need to prepare an additional Contingency Fund. 


Contingency Fund

The bank will be giving you the money in installments throughout the construction period. The first draw will be during “Lock Up” period: this is when the doors and windows of the building are in place, hence the name.

This means you still need to make sure you have enough funds to get the lumber, the foundation, and the structure of the house built. We generally recommend about 10% of the construction cost for these expenses. 


Conclusion

In order for you to build a $2.6 Million dollar property, you need to prepare about $650,000 for the down payment. PLUS and additional $260,000 on the side.

If you’re looking to construct a home, make sure you do it right by contacting Jas Oberoi today.

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