Navigating the world of real estate development can be challenging, but the right construction financing helps projects stay on schedule and funded at each milestone. For developers, builders, and savvy real estate investors, a construction loan is a critical tool that provides the funds needed to build a property. Unlike a traditional mortgage, which disburses funds as a single lump sum to purchase a finished home, a construction loan provides funds in a series of advances as the project progresses.
This structured approach ensures that you have the capital you need at each crucial phase of the build. Use this guide to understand the draw framework in British Columbia and Alberta, align documents early, and support steady advances from foundation to final occupancy.
Understanding Construction Loans
Construction loans are short-term loans designed to cover the costs of building a new home. Because the collateral is a project that is not yet complete, lenders price construction loans higher than traditional mortgages. However, the phased disbursement of funds helps to manage that risk by tying payments to project milestones.
The draw schedule is the heart of a construction loan. It’s the plan that outlines when funds will be released to the builder or contractor as work is completed and inspected. This process protects both the lender and the borrower, ensuring that funds are used appropriately and that the project maintains its cash flow.
A Closer Look at the Draw Structure
A typical construction loan draw schedule follows the progress of the build, with funds released at key milestones.
- Land Advance: The first draw is typically for the purchase of the land or property.
- Lock-up (40% complete): Funds are advanced once the foundation, framing, and exterior sheathing are in place. This milestone ensures the basic structure is secure.
- Drywall (70% complete): The next draw often occurs after the plumbing, electrical, and mechanical systems are roughed in and the interior drywall is complete.
- Final Occupancy (100% complete): The final draw is released upon project completion and receipt of the occupancy permit.
For each draw, the following is generally required in order to proceed:
- Progress report
- Confirmation of construction insurance
- Building permit still active
- New home warranty
- $250 admin fee for each draw
- $500-$650 legal fee for each draw for borrower to sign updated promissory note and authority to pay, or other legal documents (as applicable)
With PHL Capital Corp. (and its affiliates; collectively “PHL”), these draws can be tailored to the specific needs of the project. If required, more draws can be accommodated as long as there is verifiable progress.
The Application Process: What’s Required?
Securing a construction loan requires more documentation than a conventional mortgage, as lenders need to assess not only the borrower’s financial health but also the viability of the project itself. A typical application will generally require:
- Application (including details on liquid assets)
- Credit bureau reports
- Builder’s resume (detailing past projects of similar size and scope)
- New home warranty (if available).
- Note: in British Columbia and Alberta, new home warranties are mandatory for new builds and cover defects in materials and workmanship.
- Building permit (if available)
- Appraisal
- Building plans
Flexible Financing for Your Project
PHL offers flexible construction loan terms that can be customized to suit your project’s timeline. We offer 18-month terms (with an added fee starting at 0.25%) and 24-month terms (with an added fee starting at 0.50%). Our loans generally have fully open terms, allowing for early repayment without penalty.
A key feature of our approach is the flexible payment options. We allow borrowers to make monthly payments throughout the build. We can capitalize interest upon the second advance, meaning interest is paid out of the unadvanced funds each month, freeing up a builder’s cash flow during the project’s development phase. The final payment option is the proportional interest reserve which is a lump sum to cover interest payments but only on the funds advanced.
We also specialize in financing mid-construction deals, providing a lifeline to builders who have run out of funds or need a partner to complete their project.
Case Studies: Real-World Solutions
These case studies illustrate how a common-sense lending approach can help builders and developers overcome unique challenges and see their projects to completion.
Case Study #1: The Duplex Development Borrowers needed funds to acquire a single detached property to tear down and build two side-by-side half duplexes. A bank would not take on the deal because one of the borrowers lacked a credit score. We provided financing at 65% of the end value net of GST for each side, with an initial land advance followed by four draws at the 40%, 70%, 85%, and final occupancy stages. This allowed the borrowers to proceed with their project and achieve stratification upon completion.
Case Study #2: The Mid-Construction Bailout A borrower was building two side-by-side homes and was 70% complete when the borrower ran out of funds. The borrower had a residential first mortgage from a bank but needed a second mortgage to finish the project. We were able to provide the borrower with three draws to complete the two homes. The borrower was able to get final occupancy and sold one of the homes, refinancing the other to pay us out in full.
Case Study #3: The Multi-Unit Stratification Borrowers were looking for construction financing for a 4-plex in the Lower Mainland. The project was unique as it involved building four smaller detached homes on a single lot that would be stratified upon completion. Given the marketability was more clear than a typical 4-plex design, we were able to assist the borrower with a construction loan from land to completion. They only required 47% LTV of the end value of the units, net of GST.
The PHL Difference
Building a project from the ground up requires a reliable financial partner. At PHL, we believe in a common-sense lending approach that looks at the overall picture, including the project’s viability and the builder’s experience. By providing flexible terms, a streamlined draw process, and the ability to finance unique or mid-construction deals, we offer tailored solutions that help you succeed.
Connect With Us
If you would like to submit a deal directly, you can do so here.
Reach out to our team directly:
👤 BC & Alberta – Contact Kevin Cheng:
📧 [email protected]
📞 604-579-0846
Disclaimer:
The information provided in this article is for informational and educational purposes only and is not intended to be, nor should it be construed as, financial, legal, or tax advice. The content is aimed at licensed mortgage professionals who are expected to use their own expertise and judgment when advising clients. We strongly recommend that individuals consult with independent professional advisors before making any financial decisions.
Approvals are not guaranteed and are subject to lender approval. Qualification for any mortgage product depends on individual circumstances, including but not limited to, property value, equity, and credit history. Rates are subject to borrower eligibility. Additional fees may be applicable, and additional terms and conditions may apply. The PHL Construction Loans product offering may change, be limited, or be canceled at any time and without notice. Draw times are not guaranteed. Please contact us for more information on this product.
PHL Capital Corp. is a mortgage brokerage and administrator, and manages and operates affiliate mortgage investment corporations, and does not provide financial planning services. PHL Capital Corp. is a licensed mortgage brokerage in British Columbia, Alberta, and Ontario (Ontario licenses #13546 & #13570).
