How does a construction mortgage work when building a home in Ontario?

A construction mortgage, sometimes called a draw mortgage, is a specialized financing product used when you are building a new home on land you own. Instead of advancing the full loan at once, the lender releases funds in stages — called draws — that correspond to milestones in the construction process, such as completion of the foundation, framing, rough-in work, drywall, and final completion.

Between draws, you typically pay interest only on the amounts advanced. Once construction is complete and the final draw is released, the mortgage converts to a regular amortizing mortgage. Lenders require inspections at each stage to confirm the work is done before releasing funds, and they may retain a holdback to comply with construction lien rules under Ontario's Construction Act.

Construction mortgages are more complex to arrange than purchase mortgages and not all lenders offer them. Qualification criteria tend to be stricter because the lender is advancing money before the home exists as collateral. You should have a firm fixed-price building contract, a detailed budget, and contingency funds for cost overruns — which are common. A lawyer experienced in construction financing reviews the mortgage commitment, monitors holdbacks, and can help ensure lien risks are managed during the build.