Construction Loan Draws: How Progress Payments Work
Learn how construction loan draw schedules work in Ontario, what inspections are required, and how to avoid costly delays when building your new home.
What Is a Construction Loan and Why Are Draws Necessary?
When you finance an existing home, the lender advances the full mortgage amount at closing and the deal is done. Building a home from the ground up works differently. Lenders are not willing to hand over hundreds of thousands of dollars before a single wall is framed, and frankly, that arrangement would not protect you either.
A construction loan — sometimes called a construction mortgage or self-build mortgage — releases funds in stages tied directly to the progress of your build. Each staged release is called a draw. The draw schedule ensures the lender's security grows in step with the value of the property, and it gives you a built-in mechanism to confirm that your contractor is actually delivering work before they get paid.
Understanding how draws work before you break ground can save you weeks of frustration and thousands of dollars in carrying costs.
The Typical Draw Schedule in Ontario
Most lenders in Ontario use a five-stage draw schedule for residential construction, though some use four stages and a handful of specialized lenders offer six. The stages are tied to measurable construction milestones, not to the calendar.
Here is what a standard five-draw schedule looks like:
- Draw 1 — Foundation complete: The footings are poured, the foundation walls are up, and the structure is watertight from below. Typically releases 15 percent of the total loan.
- Draw 2 — Lock-up stage: Framing is complete, the roof is on, windows and exterior doors are installed, and the building is secure from the elements. Typically releases an additional 20 to 25 percent.
- Draw 3 — Rough-ins complete: Electrical, plumbing, and HVAC rough-ins are finished and have passed municipal inspections. Insulation is in place. Another 20 to 25 percent is released.
- Draw 4 — Drywall complete: Interior drywall is hung, taped, and primed. This stage confirms the project is moving toward completion. Releases another 15 to 20 percent.
- Draw 5 — Occupancy / completion: The home is finished, an occupancy permit has been issued by the municipality, and a final inspection confirms everything is in order. The remaining balance is released.
Percentages vary by lender and by the specifics of your project. Your mortgage broker will help you match a lender whose draw structure aligns with how your contractor expects to be paid.
How the Inspection Process Works
Before any draw is released, the lender sends a qualified appraiser or inspector to the site. This is a cost-in-progress inspection, and you pay for it — typically between $150 and $300 per visit. The inspector confirms that the work described in the draw request has actually been completed to a satisfactory standard.
The inspector files a report with the lender, and assuming the milestone is confirmed, the lender authorizes the advance. Funds are usually deposited into your account within five to ten business days of an approved inspection, though some lenders move faster.
Here is where many first-time builders get caught off guard: if the inspector determines the work is only partially complete, the lender may release only a portion of the scheduled draw, or hold the advance entirely until deficiencies are corrected. That delay can put your contractor in a difficult cash position and create tension on site.
The practical takeaway is this — before you request a draw, walk the site with your contractor and confirm the milestone is genuinely finished. Do not request an inspection speculatively.
Interest Payments During Construction
During the construction period, you are only paying interest on the funds that have actually been advanced, not on the full approved loan amount. This is called interest-only on drawn funds, and it keeps your carrying costs manageable while the build is underway.
As each draw is released, your interest obligation grows. By the time the final draw is advanced at occupancy, you are paying interest on the full loan. At that point, most construction loans convert to a standard mortgage, and you begin making principal and interest payments on a regular amortization schedule.
The construction period is typically set at six to twelve months. If your build runs over that window, extensions are usually available but they come with fees and sometimes require a fresh appraisal. Keeping your project on schedule is genuinely worth the effort.
Common Pitfalls to Avoid
Construction financing has more moving parts than a standard purchase mortgage, and the margin for error is smaller. These are the issues that cause the most problems for Ontario borrowers:
Misaligned draw and payment schedules. Your contractor will have a payment schedule written into their contract. If the contractor expects payment at milestones that do not match your lender's draw stages, you may need to bridge the gap out of pocket. Review both documents together before signing anything.
Insufficient contingency reserve. Construction budgets routinely run over. Lenders generally will not advance more than the approved amount regardless of what happens on site. You need a personal contingency of at least ten to fifteen percent of your total construction budget sitting in accessible savings.
Not understanding HST obligations. In Ontario, new home construction is subject to HST. You may be eligible for the HST New Housing Rebate, but the rebate is not automatic and the rules around assignment are strict. Speak to a tax advisor before your project starts.
Permit delays triggering loan expiry. If municipal permit approvals take longer than expected and your construction loan has a fixed commitment window, you could find your approval expiring before you break ground. A good mortgage broker will flag this risk early and structure the commitment accordingly.
Choosing the wrong lender. Not every lender offers construction financing, and among those that do, the draw structures, holdback policies, and flexibility vary considerably. Working with a broker who has active relationships with construction lenders is not optional — it is essential.
How a Mortgage Broker Adds Value on a Construction File
Construction mortgage files are more complex than standard residential files. They involve land valuations, builder agreements, cost-to-complete assessments, and ongoing draw management throughout the build. A broker who handles these files regularly knows which lenders have flexible draw schedules, which will work with owner-builders, and which have the fastest turnaround on inspection reviews.
At Empower Approved Mortgage Solutions, we work through DLC National, which gives us access to a wide network of lenders — including those with dedicated construction products that are not available through retail bank branches. We review your builder contract alongside your financing so that both documents are working in the same direction before any commitments are signed.
Planning a new build in Ontario is one of the most significant financial undertakings you can take on. Getting the financing structure right from the start protects your budget, your timeline, and your relationship with your contractor.
If you are planning a new construction project in Ontario and want to understand your financing options before you commit to a lot or a builder contract, reach out to Sunny Singh at Empower Approved Mortgage Solutions. Email us at sales@empowerapproved.ca or call (647) 775-0823 — we will walk you through every stage of the process and make sure your draw schedule works for your build.
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This article is general editorial information, not advice for your situation.