If you’re looking to secure construction financing for a self build construction project for a new single family residence you plan on occupying post construction, then its important to be taking a more holistic view of the construction financing process.
Depending on your individual situation, there can be two or three different construction related loans that may need to be arranged to complete the project.
In some cases, a loan is required to acquire the land and perhaps fund some site development costs. Then the actual building construction loan is used to complete the primary construction. And when the project is complete, a take out or long term mortgage is required to retire the previously registered mortgages on the property.
If the land is already owned outright, then a construction mortgage and a long term take out mortgage will still likely be required.
Thinking with the end in mind entails calculating out the effective rate of financing in the short term and the longer term for the entire project.
The combination of construction related loans that yields the lowest cost of financing is likely going to be your best option, all other things being considered.
For instance, a construction loan through a bank or institutional lender may yield the lowest potential construction mortgage available to you, but typically an institutional lender will automatically require you to secure a long term take out mortgage with them as well.
The combination of the two mortgages may or may not yield the lowest overall cost of funding over time as you are limited to the selection in long term mortgage rates and terms being offered by the lender and you will have virtually no bargaining power to negotiate down the rate based on competitive offers.
An alternative approach would be to select a private mortgage construction loan that does not require that you have a take out mortgage in place prior to the commencement of construction.
This will provide you with more time to shop the market for the best long term financing deal and typically once a construction project is nearer to completion, the offers can become more competitive.
Of course there is no guarantee that the combination of a construction loan from a private lender and a take out mortgage from an institutional lender will be cheaper, but it can be.
This is why its worth going through the exercise of comparing your options from the outset, including both the near term and long term financing in the process.
The best way to determine which way to go is to work with a construction mortgage broker who is well versed in both approaches to construction financing and can help you work through the different scenarios that are going to be directly applicable to your particular situation and requirements.