Its not all that uncommon for many property owners, developers, and builders to actually prefer a private construction loan over what they could qualify for at a bank or institutional lending organization.
On the surface, that might not seem to make any sense as the cost of financing at a bank or institutional lender is going to be lower than what a private mortgage lender will be offering, right?
The answer to that is yes and no.
On the surface, or at the outset, the posted interest rate on a construction loan from a bank is likely going to be cheaper or lower than from a private mortgage lender on a similar deal.
But its also not uncommon that the complex requirements of a bank or institutional construction mortgage can cause the borrower to incur other costs during the project that, when factored into the effective financing rate, can sometime make the bank a more expensive option in the end.
Which leads us to the key reasons why a private construction loan can be more popular with certain borrowers, especially those that have at least one construction project under their belt, or are in the construction business for a living.
The key with any construction project is accurately budgeted cash flow and a timeline to completion that is closely followed so that everything gets done on schedule and no significant if any incremental costs are incurred.
From a predictability of approval and funding point of view, private construction loans tend to get approved faster and their draw advance process much easier to comply with in terms of when the draws will occur, how they will be administered, and the probability of getting all the budgeted or required funds advanced on schedule.
There is certainly a higher cost of funds for this type of financing, but the added benefits are worth it for many borrowers.
Private construction loans are also common in a bridge financing sense in situations where a bank construction loan is not providing full advances or the borrower is not able to meet the banks requirements in some form, causing the project to stall out unless another source of capital is acquired quickly.
So whether you use a private construction loan as a primary source of construction financing or a bridge loan to complete a project that already has a construction mortgage facility in place, private mortgage construction loans may very well be your first and best choice for construction financing.
A site development loan or mortgage is typically not provided as part of a construction loan for building and is a stand alone loan secured by a mortgage against the property.
The loan is provided, based on the value of the property immediately before site development is started, and immediately after the completion of the site development work.
To be more specific, site work can include landscaping, earth moving, the installation of services such as power, water, communications, and sewer, as well as any other preparatory work that brings the property up to a state where building permits for construction can be issued.
The main keys to site development financing is the market value of the property and the exit strategy to repay the loan.
This is, for the most part, an equity based financing activity due to the fact that the property is not in a revenue producing condition. That being said, if the builder, developer, or property owner has the ability to service the debt from other sources, then bank or conventional lending options can still apply.
The exit strategy for a site development loan is typically going to be either the resale of all or part of the land being landscaped and serviced, or the refinancing of the site development loan into a construction loan that recognizes the improvements made to the land and the related increase in equity this may generate.
Toronto site development loans can be in first or second mortgage position in terms of security. Second mortgages will typically cost more than first mortgage charges.
Development loans for land servicing can be acquired for single lots, a combination of lots, or larger scale developments or subdivisions.
If you are in need for a Toronto site development loan for a project you are planning or are in the middle of, I recommend that you give us a call so we can go over your requirements together and discuss potential financing options.
When looking at different renovation and construction loans, there are number of things that need to be considered in order to determine which option is the best fit for your particular project and financial profile.
If the size of the renovation and the related costs can be covered off within 6 months to one year from the time the work is completed, then you most likely would want to consider financing facilities that are open for repayment and provide you with easy access to the funds required.
This would speak towards a unsecured line of credit, or secured home equity line of credit.
The funds in both cases are readily available at an interest rate that will be based on the prime rate and can be paid back at any time without penalty.
Lines of credit do not typically have any use restrictions so once in place, provided that you meet the terms and conditions of financing on an ongoing basis, you can use the funds for anything you like.
Even if you plan to repay the cost of renovation off over a longer period of time, you can choose to gradually pay down the line of credit, or term the renovation costs out via a term loan or second mortgage financing option.
A term loan can be secured or unsecured with varying repayment periods. If the loan is unsecured, the repayment period available is typically not going to be more than seven years. For a secured term loan, the amortization period can be as high as 30 years.
If the renovation project is more significant than what can be financed through a line of credit, then a construction loan can be arranged with an established draw schedule for advances once certain bodies of work are completed.
At the end of the renovation and construction work, the construction loan would then be termed out into a long term mortgage which could be a home mortgage refinance of an existing residential home mortgage, a new first mortgage if nothing was previously in place on the property prior to construction, or a second mortgage.
As you can see there are a lot of different approach you can take when financing a renovation project.
The key is to understand the cost of the project and your long term plans for repayment of any Toronto home renovation loan you take on.
Depending on who is actually applying for the construction mortgage, the requirements by the construction lenders can be slightly different.
For instance, a builder or developer is likely going to need to have home builder insurance in order to secure financing while an individual building their own home will not.
As an individual property owner that is expecting to live in the home once its completed, the property owner can be acting as the general contractor or a project manager for the project. Regardless of how the individual plans to go about the process of construction, it will be important to the lender that there is a clear plan prepared prior to applying for financing and that all contracts, costing estimates, and regulatory requirements such as permits and licenses are in place.
For a Toronto home construction loan from a bank or institutional lender, the property typically needs to be free and clear of any encumbrances in order to make the financing work. To be more specific, most bank construction loans require first mortgage position against the property and in very rare cases will they be prepared to work in a second position, and then only if the first position is for a very small amount.
Another aspect of securing a Toronto home construction loan from a bank is that in almost all cases the bank or institutional lender will require that you also apply for the take out mortgage that will pay out the construction loan when the work is completed.
Banks, for the most part, are not interested in just providing a Toronto home construction loan by itself. The value of providing the construction financing in the first place is to be able to secure the more lucrative long term residential home mortgage.
While there is nothing wrong with having the construction mortgage and take out mortgage at the same lender, it does increase the amount of up front work required at the outset to get financing in place and it further limits your ability to look at what the market may have to offer in terms of long term mortgage options.
Where cost of financing isn’t the primary concern of the borrower, private mortgage financing has become a very poplar type of Toronto home construction loan.
While private construction financing does come at a higher potential cost of financing, it does provide a number of benefits such as considering second mortgage financing security, a faster application and approval process, and more streamlined and predictable draw process, and the lack of the need for the take out mortgage to be approved prior to construction in most cases.
If you need to secure a Toronto home construction loan or are just planning ahead, give us a call so we can go through you situation with you and provide relevant construction financing options for your consideration.
Toronto Home construction loans can be obtained from both bank or institutional lenders as well as private mortgage lending sources.
But just because the source of home renovation and construction loans is a private lender, does not automatically infer that its inferior or higher cost.
Home construction financing needs provide a good match between what the lender program delivers and what the customer or applicant requires.
In many instances, Toronto home construction loans are provided through a private second mortgage registered after a residential home mortgage in first position on the subject property. The private mortgage is not typically selected because the applicants could not qualify for a bank construction loan. The rationale for using a private mortgage is typically based on some combination of:
Yes, on the surface a second mortgage from a private lender is going to cost more in terms of stated interest rate. But there is a cost benefit relationship in that the added initial cost does provide certain benefits that individuals are willing to pay for. By the end of the project, however, there is no guarantee that the overall cost of a bank construction financing source will be cheaper than a private money source, all things considered.
In the case of bank or institutional construction mortgages, the potential exists that this can be your lowest cost of financing. This assumes that you have the necessary time to apply and manage the financing process with an institutional lender, that there will not be any unexpected costs incurred due to draw reductions or delays, or if the take out mortgage that you’re going to have to take from the same bank or institutional mortgage lender is providing the best pricing available to you in the market.
Just having a singular focus on the interest rate written into the mortgage commitment will not necessarily guide you to the best choice of construction financing.
The best way to approach the Toronto home construction financing process is to work with an experienced mortgage broker that provides construction loans and has a strong track record of not only placing both bank and private lending construction mortgage, but also can provide customer feedback of their help and assistance through out the construction loan administration process.