Are you planning to build a home? Unless you intend to pay cash for your new build, a construction mortgage is a must. While obtaining construction financing may not be difficult, the real challenge is finding the right lender to meet the specific needs of your project.
Construction projects are complex undertakings with countless variables at play. To ensure a successful outcome, you need to be well informed, well organized and well supported by the right lender.
Four factors to take into account when seeking construction financing for a new build:
How much do you need to have set aside or available in credit facilities to ensure your project is completed in a timely manner? Budgeting is essential for a successful construction project, but the reality is that most projects exceed their initial budget by 10–15%. When securing financing, you need to ensure that any cost overruns won’t leave you high and dry.
Will your lender provide additional financing over and above the initially agreed upon loan-to-value (LTV) ratio? Many lenders lack the flexibility to do this, so it’s critical to find out in advance.
Cash flow management
Keeping track of invoices, making timely payments to tradespeople and ensuring that project timelines are met are all important elements of any construction project. These factors all tie back to ensuring that you have the right funds at the right time to keep the project moving forward.
Managing cash flow includes being mindful of your credit usage during the build as this can affect your take-out financing arrangement. For example, maxing out your credit cards can cause your credit score to drop due to overutilization. To avoid problems, you need to understand your lender’s draw structure and any limitations it may put on your project.
Sometimes delays in work by contractors can’t be avoided, such as when they are overbooked with projects or grappling with a shortage of good tradespeople. And just as adjustments to your building plan can result in higher material costs and an increase in the overall project budget, so too can a longer project time frame translate to higher financing costs. That’s why potential contractor delays should be included in your cost-overrun projections.
Rigidity of lender guidelines & draw schedules
Many lenders have strict guidelines regarding when you can draw funds – for example, a three-draw limit with defined timelines and required construction stages that must be reached before funds are released. In addition, while packaged loans where the construction lender also offers take-out financing may seem like an attractive all-in-one solution, the most competitive rate in the market can often be obtained elsewhere.
Some lenders, like Pillar, have flexible draw schedules that allow for better cash-flow control while limiting delays and cost overruns. At the same time, they allow the construction mortgage to be taken out (without penalty) upon completion of the build. This approach enables you to obtain the most competitive rate in the market with the lender of your choice.
It pays to do your homework
These are only a few of the points to consider when deciding how to finance the construction of a new home. Whatever the scope of your project, the best way to avoid problems and surprises is to do your homework before diving in. This means developing a clear plan, making allowances for unexpected delays and costs, and reading all the fine print.
Ultimately, your goal is to find a lender offering flexibility with a reasonable exit strategy to ensure your investment is protected throughout the entire process. If you manage this, you’ll be on course for a construction project done right and within budget.
At Pillar, we have over 30 years of experience in construction financing. Working closely with your mortgage broker, we can provide flexible financing solutions tailored to your needs.
To get a sense of the financing costs associated with building a new home through Pillar, try our construction draw calculator: