Construction Financing for Custom-Built Homes in the GTA
Building a custom home is a different financing animal than buying one. Here is how progress-draw construction mortgages actually work in Ontario.
Custom home builds in the GTA — whether you are tearing down a bungalow on an established lot or building from scratch on serviced land — require a specialized construction mortgage. The mechanics are very different from a standard purchase mortgage, and the difference matters at every stage.
Progress-draw vs. completion mortgage
There are two main flavours of new-build financing.
A progress-draw mortgage releases funds in stages as the build hits defined milestones — typically four to five draws (excavation/foundation, framing/lock-up, drywall/interior, completion). Each draw is preceded by an on-site appraisal confirming the work is in place.
A completion mortgage funds the entire amount at substantial completion. It works for spec builders or buyers purchasing a builder-completed home, but it is not appropriate for true custom builds because it leaves the borrower funding construction out of pocket until handover.
What lenders look at
- Land value: serviced lot in a recognized municipality is the cleanest input
- Total project cost: land cost + hard costs + soft costs + contingency
- Loan-to-cost ratio (typically 75-85%)
- Loan-to-completed-value ratio (typically max 80%)
- Builder credentials: Tarion enrolment, prior completed projects
- Borrower income and net worth (more conservative than a typical purchase)
Typical structure for a $1.4M build in Brampton
- Land already owned, valued at $500K
- Hard construction costs: $700K
- Soft costs (permits, design, financing): $80K
- Contingency: $70K
- Total project cost: $1,350,000 (excluding land if free and clear)
A construction mortgage of $900K - $1,050K is realistic on these numbers, with the borrower funding the gap. At each draw stage, an inspector confirms work in place and funds are advanced.
Interest during construction
You only pay interest on funds drawn, calculated monthly. So your first few months may have very small interest payments; later draws push the carrying cost higher. Most lenders capitalize the interest into the loan if requested.
Conversion to permanent financing
At occupancy, the construction loan converts to a regular term mortgage — typically a 5-year fixed or variable. Some lenders include this in the original commitment; others underwrite it again at completion.
Where things go wrong
- Cost overruns that blow through contingency
- Builder cash-flow issues that delay draws
- Underestimated soft costs (permits, surveys, engineering revisions)
- Holdback funds (usually 10%) released only after Construction Lien Act periods
Talk to a broker who specializes in this
Construction financing is one of the highest-margin-of-error products in mortgage lending. The wrong lender for your situation can mean draws delayed by weeks, holdbacks held longer than necessary, or rates that price in builder risk you should not be carrying.
At Empower Approved we have placed construction mortgages from custom infill homes to mid-rise multi-residential projects across the GTA. If you are six to twelve months from breaking ground, that is the right time to start the conversation.
Call (647) 775-0823 or email sales@empowerapproved.ca.
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This article is general editorial information, not advice for your situation.