For a new build, the construction loan will either be a first mortgage registered against the property if the property is free and clear, or a second mortgage if financing for land acquisition is already registered.
Institutional lenders will typically require that the construction loan and the long term take out mortgage be arranged at the same time so that there is a predetermined exit strategy for paying out the construction mortgage via a new long term mortgage.
Private lenders will be less concerned about having the take out mortgage arranged in advance as long as they feel that the property and project would likely attract interest from long term mortgage providers.
Its not uncommon to see brokers provide private mortgage construction loans for projects where they have very strong term mortgage financing sources so they can provide all their customer’s construction financing requirements.
With home additions and renovations, the construction loan financing options can be more varied depending on the size of the loan and the repayment plans of the owner/builder.
If the addition is going to be extensive, then a traditional construction mortgage followed by a take out mortgage would likely apply.
For smaller financing amounts, the borrower may wish to just arrange a second mortgage for the amount of the work and effectively create their own construction loan and take out mortgage all in one step.
A third option for smaller additions and renovation projects would be to utilize a secured line of credit registered against the home property. The benefit of this type of credit facility is that the funds are immediately available to the borrower when required. There are no construction draws to manage and the interest rate will typically be between prime and prime plus 2, depending on the borrower profile.
At the end of the project, the borrower will also have the option to keep the outstanding balance on the secured line, pay interest only every month on the outstanding balance, and work down the principal when cash flow can be freed up, or arrange a take out mortgage. The take out mortgage could be either a new overall first mortgage or a second mortgage to pay out the line of credit and repay the construction costs over time through a amortized mortgage payment.
The key point to make here is that there can be several different strategies that you can consider for your home construction project when it comes to securing a construction loan. If you have a project you’re considering, I suggest that you give me a call and we can determine together the construction financing strategy that will best meets your needs.