Building a new custom home is truly a rewarding and life-changing experience. In fact, it is one of the biggest investments and financial decisions one makes in his/her lifetime. But, the question is, will you be able to afford it? What are your financing methods? Are you going to take a home loan?
There are numerous things one must know about financing and receiving home loans for custom home construction in Canada. Fret no more, as in this article, we are going to tell you all you need to know about getting loans and other financing ways for constructing a custom home in Canada.
How to finance custom home construction in Canada?
There’s only one answer to this- a construction mortgage.
A construction mortgage is a mortgage that is given to new homeowners in order for them to pay or finance their newly constructed home. You will still be needing a construction mortgage to build your new custom home, even if you have already bought the land you will be building your home on, and even if the land was inherited or transferred to you by someone else.
Generally, a construction mortgage is going to cover the cost of the land you will be constructing your new custom home on, as well as the cost of the construction itself. But, it is going to cover the cost of the living expenses.
Types of construction mortgages in Canada
In most cases, there are 7 types of construction mortgages in Canada:
1. Conventional Mortgage
A conventional mortgage is a type of mortgage that is not guaranteed or insured by the governing body. Generally, it is available for new homeowners by private mortgage lenders, or even by enterprises that are sponsored by the government.
2. Open Mortgage
In an open mortgage, you are allowed to pay off a part of the total debt. You can then pay this full amount later without having to worry about any unnecessary penalties, prepayment charges, or fines. In most cases, you will have term lengths between 6 months to even a whole year. Therefore, this type of mortgage provides more flexibility in terms of paying and borrowing to new custom homeowners. Homeowners can either choose to repay all, or a part of the mortgage during the term.
3. Variable Rate Mortgages
In a variable rate mortgage, the interest rate is not fixed. In most cases, variable-rate mortgages are divided into 3 main categories- standard variable rates (SVRs), tracker rates, and discounted rates.
When homeowners receive a variable rate mortgage from mortgage borrowers, the mortgage payments are calculated including the interest rate, as well as the principal value. These mortgage payments will remain the same in the whole mortgage term period. But, when the market interest rate goes up or down, so will the mortgage rates.
4. Capped Rate Mortgages
A capped rate mortgage is another type of variable rate mortgage. In this mortgage type, there is a fixed upper limit known as ‘the cap’. These mortgages are capped by mortgage lending institutions. This way, homeowners don’t need to worry about the interest rate going too high, but will also benefit from low-interest rates. However, home wonders will also receive a penalty in case they decide to pay back their mortgage amount in full.
5. Closed Mortgages
A closed-end mortgage is another type of mortgage that cannot be prepaid, renegotiated, nor refinanced. Therefore, this provides more stability to homeowners in terms of borrowing money for custom home construction. This way, homeowners will also be able to lock a certain interest rate in during the term of the mortgage. Not only do people benefit from lower interest rates with this type of mortgage, but also have peace of mind. In case the interest rates are predicted to rise again, homeowners can consider going for a home loan that has an extended-term period.
6. Convertible Mortgage
A convertible mortgage is an adjustable-rate loan. This type of mortgage allows homeowners to borrow the loan to convert their loan amount into a fixed-rate mortgage. This type of mortgage is ideal when mortgages are very high, as it gives new homeowners a chance to lock in lower rates.
Therefore, in this mortgage type, you will be receiving a fixed rate between 6 months and a year. Here they’ll have the choice of locking the lower rates for an extended term or even continuing for a more flexible rate in the short term.