Building your dream home is an awesome adventure with lots of choices to make. One big choice is deciding between draw vs completion mortgages to pay for your new house. In Canada, people usually pick between these two types of construction mortgages when building a new home.
Knowing the differences between draw mortgages and completion mortgages can help you plan your money better and make the building process smoother.
Understanding The Different Mortgages
Once your home is complete, both a draw mortgage and a completion mortgage will revert to a traditional one. But there are a few differences in how it works from the beginning
A draw mortgage differs significantly from a traditional mortgage primarily in how the funds are disbursed.
For traditional, the full loan amount is typically provided to the borrower at once, upon the closing of the home purchase. This makes traditional mortgages well-suited for buying existing homes. In contrast, a draw mortgage is designed for construction projects, releasing funds in stages or “draws” as the building reaches specific milestones, rather than specific monthly mortgage payments. This phased approach allows lenders to ensure that the construction is progressing as planned before releasing additional funds.
On the other hand, a completion mortgage deviates from traditional mortgages by requiring the borrower to fully complete the construction before any funds are released. This means the borrower may need to cover the construction costs upfront or secure interim financing until the project is finished. Then the completion mortgage pays out in a lump sum, similar to a traditional disbursement method.
Draw Mortgages: A Step-by-Step Financial Partner
Draw mortgages are set up to match the construction steps of your new home, giving you money in parts as each phase of the building is finished. This way of financing is flexible and goes along with how your construction is moving forward, making sure you have the money right when you need it the most.
Advantages of Draw Mortgages
A draw mortgage is like having a money buddy who helps you out during each step of building your house. With this kind of construction mortgage, you get money in parts or “draws” as your house hits different building points. For example, you might get some money after the building process begins and the base of the house is done, more money after the walls are up, and the rest when everything inside is finished.
The great thing about a draw mortgage is that it’s flexible and safe. Before you get each part of the money, someone checks to make sure the building is going right. This way, you know your money is being used well. Plus, you only pay interest on the money you’ve gotten so far, which could save you some cash and put you in a better financial position while your house is being built.
Downsides of Draw Mortgages
But remember with a draw mortgage, you have to start paying back the money once it’s given to your builder. This means if you’re selling your old house and it hasn’t sold yet, you might have to pay for two houses at once until it sells.
Choosing a draw mortgage does sometimes come with a few extra steps. Whenever you ask for more money, there are a few checks that need to be done. The lender will want to make sure that the work is done right and matches what was agreed upon.
This can cause delays, especially if the building work doesn’t pass the inspection or doesn’t match the draw’s conditions.
Completion Mortgages: Simplicity and Peace of Mind
When talking about draw vs completion mortgages, simple is the best word to describe the completion option.
Completion mortgages give home builders a different option that many people like because it’s simple and stress-free. With this kind of mortgage, you only have to think about money stuff after your dream home is all built and ready for you to live in.
Advantages of Completion Mortgages
Unlike draw mortgages, where funding is received in stages, a completion mortgage allows you to defer the entire loan payment until your home is completely built and ready to move in. This means no mortgage payments are due until you’re handed the keys, meaning you don’t have to worry about managing construction payments and can focus on preparing for your move instead.
Completion mortgages are ideal for those who prefer a straightforward financial path with minimal involvement during the building process. It provides a clear picture of your financial obligations from the start, without the need for interim inspections or draws. Think of it like a traditional mortgage where your first mortgage payment starts shortly after your possession date.
Downsides of Completion Mortgages
It’s important to note that getting a completion mortgage might come with its set of challenges, especially in terms of flexibility. For starters, all the financial ducks need to be in a row before construction begins. That means any changes in the budget or unexpected expenses have to be covered out of pocket, as the loan amount doesn’t adjust to accommodate post-agreement modifications.
Also, getting approved for a completion mortgage can be tougher. Lenders might ask for a better credit score or a bigger down payment because they see it as riskier—they don’t give you the money until the project is all done.
But, even with these points to think about, lots of people find that knowing exactly when payments start after the construction is finished makes completion mortgages a good way to pay for their dream house.
Understanding Interest Rates
Interest rates play a crucial role in determining the overall cost of your mortgage. Whether you choose to go with draw vs completion mortgages, this will apply. These rates impact your monthly payments and the total amount you’ll pay over the life of the loan.
Interest Rates on Draw Mortgages
As mentioned, your mortgage interest rate will be applied only to the amount of money that has been drawn at any given time, not the entire approved loan amount. So during the initial stages of construction when the draws are smaller, your interest payments will also be smaller.
However, as the build process continues and more of the loan amount is drawn to pay for the building costs, your interest payments will increase accordingly. This payment schedule can offer some initial financial relief during the early stages of construction but requires careful financial planning as payments increase.
Interest Rates on Completion Mortgages
In contrast, completion mortgages usually have a fixed or variable interest rate applied to the total loan amount, similar to traditional mortgages. The key difference with completion mortgages is that no payments, interest or otherwise, are typically required until the construction is complete and the loan converts into a standard mortgage structure.
This can provide significant peace of mind during the construction process, as buyers don’t have to worry about making mortgage payments until they take possession of the home.
However, it’s important to understand the terms of your mortgage agreement, as some completion mortgages may accrue interest during the construction period. That would then be added to the principal amount owed once the mortgage terms begin.
Draw vs Completion Mortgages: Making the Choice That’s Right for You
Both draw and completion mortgages are good options, but they work differently. Choosing the right one depends on your financial position, how much risk you’re okay with, and if you want to be closely involved in the build process.
Draw mortgages let you have more control and might save you money during the building process, but you have to be more involved. Completion mortgages make things simpler because you only deal with the money stuff once at the end, but you might have to pay a big amount when everything’s done.
No matter which type of mortgage you pick, talking to a mortgage professional is super important. They can help you understand your choices better. Building a home is a big deal, and having the right mortgage can help make the journey to owning your home smoother and happier.
