Construction financing works differently from a standard mortgage because the asset does not fully exist yet. Here is how ground-up construction loans work in Ontario.
Funded in draws, not a lump sum
Rather than advancing all the money at once, construction lenders release funds in stages — draws — as the project hits milestones, with inspections confirming progress before each advance. This protects the lender and keeps the project on track.
Loan-to-cost and equity
Lenders size the loan against project cost and projected value, advancing a percentage and requiring the sponsor to contribute equity. Pre-sales or pre-leasing can improve the terms available.
Interest and carrying costs
Interest typically accrues only on funds drawn, and many loans build in an interest reserve to cover carrying costs during construction. Budgeting accurately for these costs is essential.
What lenders require
Expect to provide a detailed budget, drawings and permits, a qualified builder, a realistic pro forma, and your track record. Matching the project to the right construction lender — bank, institutional or private — is key, and the loan often transitions to permanent financing on completion.
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