Its not uncommon that someone contacts me to better understand how to arrange construction financing for some form of facility expansion on an existing property.
The typical scenario has a property that already has a residential or commercial mortgage in place and the plan is to add to or expand the existing property holdings.
Another scenario would relate to someone asking if they could get the existing mortgage renewed along with some existing funds for construction that could be drawn down in the future.
In just about all cases, a construction loan is going to be a new borrowing facility, separate and distinct from the mortgage or mortgages now in place.
One of the main reasons for this is that the construction process has risk, so there is a higher cost of financing associated with this type of funding than for a completed project or existing piece of real estate where the buildings attached are in a completed state.
So the first thing to remember is that a construction financing facility is separate from all other loans or liens.
Therefore, its going to be near impossible to refinance an existing mortgage with some extra funds for future construction, especially at lower rates of interest, due to the different uses of funds.
Lower cost lenders will typically want a first mortgage position as well, so it may not be even possible to arrange construction financing from a bank where a significant existing mortgage is in place.
If there is enough equity in the property and the amount of financing required is small enough, you may be able to arrange a secured line of credit against the property.
But the most common form of construction financing in these situations is from private lenders as they are prepared to go into a second mortgage position to secure the construction loan for amounts that are more reflective of the end of construction market value.
The challenge with private lending is that when financing is approved, it is expected that funds will be drawn shortly there after as unlike a bank, private’s have a more finite amount of capital available, and want to have their money out in the market earning interest as quickly as possible after it becomes available.
So planning months ahead is certainly a good idea, but if private lending is the ideal source, then the application and commitment process will need to occur closer to when the funds are needed.
This is one of the reasons why it can be so important to work with a mortgage broker that has a focus on construction funding from private sources. The broker can get you qualified in advance and then place the deal with a private source that can fund your deal at the time when funds are required.
The last thing to consider in your pre planning process is how the construction funds will be repaid over time.
If you want to refinance it into your existing mortgage, then it would be wise to find out the cost and procedure for doing so. Planning further in advance, especially before the existing mortgage is renewed, may allow you to structure your mortgage renewal in such a way to make a further refinancing of the construction take out more cost effective.
Or if a new lender is going to be required for the refinancing of both the existing mortgage balance and the construction loan funds, then this should also be explored with options understood prior to starting the construction project.
Once again, there can be many variations around this theme which is another reason to utilize an experienced mortgage broker who can work through each scenario with you and come up with the best options to consider.