A construction mortgage releases money in stages as your garden suite actually gets built. Here’s how progress draws, lender inspections, and interest-only payments actually work in practice.
What a Construction Mortgage Actually Is
A construction mortgage, sometimes called a draw mortgage, releases money in stages as your garden suite actually gets built, rather than handing you one lump sum on closing day. That structure matches how a build spends money in the first place: a deposit at signing, a payment once the foundation is poured, another once framing and the envelope close in, and a final release at completion. Compare that to a personal loan or a straight cash-out refinance, where interest accrues on the full amount from day one even though most of it sits unused for months while permits and early trades catch up. For homeowners without enough HELOC room to cover a full $300,000-plus build, a construction mortgage is often the tool that makes the project possible at all, sized against the property’s value once the suite exists rather than only against today’s equity.
How the Draw Schedule Actually Works
Draw mortgages release funds against verified progress, and lenders typically require their own inspection at each stage before releasing the next draw, separate from your municipal building inspections. A common structure mirrors our own milestone schedule: roughly 15 to 20 percent at the foundation stage, 25 to 30 percent once framing and the roof are enclosed, another 25 to 30 percent as mechanical, electrical, and drywall wrap up, and the balance at substantial completion. Each lender-ordered inspection typically costs $150 to $350, billed to you, and can add a few days to each draw while an inspector’s schedule and your contractor’s timeline line up. Building that lag into your own cash-flow expectations, rather than assuming funds arrive the moment a milestone finishes on site, keeps your relationship with your contractor and your lender running smoothly through a six-to-ten-month project.
Interest-Only During the Build
Most construction mortgages charge interest only on the drawn balance during the build, which keeps monthly payments manageable while your suite is still unfinished and not yet earning rent. On a $320,000 project drawn in four stages over roughly seven months, this can mean paying interest on an average balance closer to $160,000 rather than the full amount from day one, a meaningful difference in carrying cost. Once construction wraps and final inspections pass, most lenders convert the draw mortgage into a standard amortizing mortgage, sometimes automatically and sometimes requiring a short renewal conversation. Confirm the conversion terms, including whether the rate resets to current market pricing, before you sign the original draw agreement, since a favourable draw rate that jumps sharply at conversion can change the economics of the whole financing decision more than homeowners expect going in.
Rate Premiums and Lender Holdbacks
Construction mortgages typically carry a rate premium of roughly a quarter to half a percentage point over a comparable standard mortgage, reflecting the lender’s added risk during an unfinished build. Some lenders also hold back a portion of each draw, commonly 10 percent, mirroring the statutory holdback required under Ontario’s Construction Act, and release it only after the lien period on that stage of work has passed. This protects the lender against liens the same way it protects you, but it means your effective available cash at each draw is slightly less than the milestone percentage suggests. Reading the draw agreement closely for exactly which holdbacks apply, and when they release, avoids an awkward cash-flow gap partway through a project when a contractor payment comes due before the corresponding lender holdback has cleared.
When a Construction Mortgage Beats a HELOC
A HELOC works well when you already have substantial equity sitting in your home today and want simple, flexible access to it. A construction mortgage becomes the better tool when your project cost exceeds your available HELOC room, when you want the lender to size financing against the suite’s completed, as-improved value rather than only today’s equity, or when you’d rather have inspection-verified draws built into the financing structure itself. Many GTA homeowners actually use both: a HELOC to bridge early deposits and unexpected costs, paired with a larger construction mortgage for the bulk of the build. Which combination fits depends on your existing mortgage balance, your home’s current value, and how much of the project’s cost your equity today can already carry without leaning on the suite’s future value.
Getting Ready to Apply
Applying for a construction mortgage involves the same broad steps as an insured as-improved refinance: an appraisal that values the property once the suite is complete, a set of construction drawings and a fixed-price contract for the lender to underwrite against, and income and credit verification much like any mortgage application. This process typically takes four to six weeks to finalize, so it belongs on your timeline during the design and permit phase, not after permits are already in hand and your contractor is asking when construction can start. Our free feasibility assessment gives you the realistic budget and concept design a lender needs to begin this process, and we’re glad to work alongside your mortgage broker so the draw schedule in your financing lines up cleanly with our own construction milestones from day one.
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