Most people in Canada finance a new house with a construction mortgage, also called a draw mortgage. The lender pays out money in stages as the house is built and inspected, not as one lump sum. That one difference shapes everything else: how much cash you need up front, how you pay your builder, and what happens if the project runs over budget. This guide explains how construction financing works in 2026 and how to prepare.
How a construction mortgage works
With a regular mortgage, the lender advances the full amount on closing day. With a construction mortgage, money is released in draws as each stage is finished. Before each draw, an inspector or appraiser confirms the work is done. A typical schedule has five draws:
View the data
| Draw and stage | % advanced |
|---|---|
| 1. Excavation + foundation | 15% |
| 2. Roof on, weathertight | 25% |
| 3. Services, drywall, cladding | 25% |
| 4. Cabinets, baths, doors | 20% |
| 5. Ready for occupancy | 15% |
A few features catch first-time builders off guard:
- You pay as you go. During construction, some lenders require only interest on the amount drawn so far. Full principal and interest payments start once the house is complete.
- Inspections cost money. Borrowers usually pay for the draw inspections, and some lenders deduct inspection fees from each draw.
- Rates and approval are tougher. Construction mortgages can carry higher rates than standard mortgages, and lenders look closely at the builder, the budget and the schedule.
- The draw comes after the work. Your builder or trades will want payment as they work, but the lender pays only after a stage is complete and inspected. You need cash or credit to bridge that gap.
How much down payment do you need?
It depends on whether your mortgage is insured.
Insured mortgages (under $1.5 million). CMHC requires at least 5% down on the first $500,000 and 10% on the portion above that. The purchase price or as-improved value must be below $1.5 million. Since December 15, 2024, buyers of newly built homes can also get a 30-year amortization on an insured mortgage.
Conventional mortgages ($1.5 million and up). Many GTA custom homes cost more than $1.5 million once land and construction are added together, so mortgage insurance is not available. NerdWallet Canada notes that construction mortgages commonly require 20% to 30% down, and lenders set their own terms.
View the data
| Home value (land + house) | Minimum down payment |
|---|---|
| $0.60M | $35,000 |
| $0.90M | $65,000 |
| $1.20M | $95,000 |
| Just under $1.5M | $125,000 |
Insured construction lending exists. CMHC offers progress advances for new homes, and private insurers have similar products. Canada Guaranty’s progress draw program, for example, covers both contractor-built and self-built homes. For self-builds, no single sub-trade contract can exceed 50% of the total construction cost.
What lenders and insurers will ask for
CMHC’s progress-advance rules show what a lender will look for:
- Approval before you start. The financing must be approved before construction starts, or at an early stage.
- You own the land first. You must hold title to the land by the first advance, and advances on vacant land alone are not allowed. Plan how you will pay for the lot, usually with equity or separate financing.
- A warranty, or proof the house meets code. Enrolment in the new home warranty program is required. For an exempt owner-built home, you need an occupancy permit or a third-party report confirming the house complies with by-laws and regulations.
- Proof you can cover overruns. The lender must assess whether you can pay for cost overruns. That is your contingency, and lenders will ask about it.
- Qualifying ratios. CMHC caps housing costs at 39% of gross household income and total debt payments at 44%.
The stress test and today’s rates
For uninsured mortgages, federally regulated lenders must qualify you at the higher of your contract rate plus 2 percentage points, or 5.25%. Rates are also moving up. The Bank of Canada raised its policy rate to 2.5% on October 28, 2026, and said more increases could follow. See what the rate hike means. A construction loan that runs for close to two years is exposed to every one of those moves.
Paying your builder: holdback and taxes
In Ontario, the Construction Act requires owners to hold back 10% of payments to contractors until lien periods expire. Your draw schedule, your contract and your holdback have to line up, or you will be short of cash at the wrong moment. See our guide to construction holdback in Ontario.
If you build your own home, you may be able to claim the Ontario new housing rebate. According to the CRA, the maximum is $24,000 if you paid HST on the land and $16,080 if you did not. Check eligibility for this and any first-time buyer rebates in CRA guide RC4028.
How to prepare
- Talk to a lender before you design. Know your borrowing limit, the draw schedule and the lender’s requirements before you commit to a size and finish level.
- Price the whole project. Include land, soft costs, City fees, HST and contingency. See what it costs to build a house in Toronto.
- Match the contract to the draws. Align your builder’s payment schedule with the lender’s draw stages and the 10% holdback.
- Hold a real cash cushion. Keep money outside the mortgage for the gap between work and draws, and for overruns. See how much contingency to carry.
- Stress-test your own budget. Run your monthly costs at a rate one or two points higher than today’s, and over a longer build.
FAQ
How does a construction mortgage work in Canada?
The lender releases funds in stages, or draws, as the house is built, usually after an inspection confirms each stage is complete. A sample schedule has five draws, from excavation and foundation through to occupancy. During construction some lenders require only interest on the amount drawn.
How much down payment do I need to build a house?
For an insured mortgage, CMHC requires at least 5% of the first $500,000 and 10% of the rest, and the value must be below $1.5 million. Above that, insurance is not available, and construction mortgages commonly require 20% to 30% down.
The bottom line
A construction mortgage pays for the house only after each stage is built, so the owner carries the gap: the land, the cash between draws, the holdback and any overruns. Plan for that before you sign anything. For the full process and timing, see the steps to build a house in Ontario and how long it takes. Want help aligning your budget, draws and builder contract? Book a 30-minute call.
Sources: NerdWallet Canada, construction mortgages in Canada; CMHC, progress advances (CMHC Improvement); CMHC, requirements for homeowner mortgage loan insurance; Department of Finance Canada, mortgage reforms (September 16, 2024); OSFI, minimum qualifying rate for uninsured mortgages; Canada Guaranty, Progress Draw Advantage; Bank of Canada, October 28, 2026 rate announcement; CRA, RC4028. Cover photo: Avel Chuklanov on Unsplash (Unsplash Licence). This is general information, not financial advice; speak with a lender or mortgage professional about your situation.