A draw mortgage is a type of construction loan in which the bank allocates funds to the builder as the construction of the home progresses. The mortgage itself takes effect upon the first draw of monies, which is done at the early stages of construction. This means that the interest rate is locked in and Title to the home is given to the purchaser.
Draw mortgages are useful for home buyers because they provide peace of mind during the construction process. The buyer knows that the interest rate is locked in, and they will not have to worry about finding additional financing once construction is complete. In addition, title to the home is transferred immediately, so the buyer can start building equity from day one.
How a Draw Mortgage Works
A draw mortgage works by allocating funds to the builder as the construction of the home progresses. As previously mentioned, the interest rate is locked in at the time of the first draw, and title to the property is transferred to the buyer immediately. The builder then has access to funds as needed throughout the construction process, up to a maximum amount that is agreed upon upfront.
Another advantage of a draw mortgage is that it offers flexibility for builders. They can choose when and how much money to draw from their loan, up to their agreed-upon limit, giving them more control over their construction budget. The Lender will provide an approval and draw schedule to allow you and your builder when draw proceeds will be released. Depending if the mortgage is an Insured High Ratio or Conventional will determine when funds are released. Before each draw release that comes from the Lender to your Lawyer to your Builder of funds an inspection will be completed to ensure the work is completed. This will be clearly outlined during the approval process. Please note some Lenders will require a 10% withhold back on the draw funds that will be released upon completion of your home. We ensure everything is clearly set out for you.
Drawbacks of Draw Mortgages
There are some potential drawbacks to be aware of with a draw mortgage. First and foremost, if something goes wrong with your renovation or construction project, you could end up owing more money than what your home is worth when it’s finished being built. In other words, if your contractor runs into any unforeseen issues or cost overruns, you will be responsible for footing the bill since you are essentially getting a loan for 100% of your project costs upfront. So, it’s important that you have a solid plan in place and contractor lined up before taking out a draw mortgage.
Conclusion:
A draw mortgage can be a helpful tool for home buyers and builders during a new construction project. It offers peace of mind for buyers so they will not have to worry about finding additional financing once construction is complete. In addition, title to their home is transferred immediately so they can start building equity from day one.
For builders, a draw mortgage offers flexibility by allowing them to choose when and how much money to draw from their loan throughout the construction process, giving them more control over their budget.
However, there are some potential drawbacks to be aware of with a draw mortgage before taking one out – namely that if something goes wrong with your renovation or construction project as mentioned above you could end up having to foot the additional cost. So, weigh all pros and cons carefully by speaking with one of our brokers, before deciding if a draw mortgage makes sense for your situation!
Also check out our mortgage affordability calculator here https://mortgagetree.ca/mortgage-tools/mortgage-calculators/mortgage-affordability-calculator/
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