What is a Draw Mortgage?
A Draw Mortgage is a method of providing financing to purchasers who wish to build a new home. This method positively addresses some of the negative issues associated with another commonly used funding source, the Completion Mortgage. While there are some proponents of Completion Mortgages, there are some pitfalls associated with it; whereas a Draw Mortgage helps alleviate these disadvantages.
With a Draw Mortgage, the bank allocates funds to the builder as the construction of the home progresses. The mortgage itself takes effect upon the first draw of monies, which is done at the early stages of construction. This means that the interest rate is locked in and Title to the home is given to the purchaser. Usually only the amount required for that stage is advanced to the builder by the bank.
With a Completion Mortgage, an approval is received at the beginning of the purchasing process but it doesn’t take effect until the possession date, so the interest rate isn’t locked in and no Title is given. This is quite risky, especially when interest rates are rising. With this type of mortgage the entire amount of the mortgage is advanced to the builder at possession.
Most banks or mortgage brokerages offering Completion Mortgages will only hold the interest rate for 120 days from the date of the approval. This is an immediately cause for concern with anyone who is building a home, as it takes longer than 120 days for construction. Short timeframes for interest rate holds such as these don’t really work when constructing new homes.
Since these banks and brokerages have such short interest rate holds they require the purchaser to be ‘re-approved’ just prior to possession. This can be a hardship for some families, whereas a Draw Mortgage doesn’t require purchasers to qualify twice. This is an important fact for purchasers who are planning or expecting a child, or if a large purchase such as a vehicle may be on the horizon. In these scenarios the mortgage re-approval may be negatively affected as the available household income is usually reduced while the purchaser is on maternity leave or when trying to make payments on a new loan or increased credit card debt.
In the unfortunate event that a builder runs into financial difficulty and they can’t complete the home, the homeowner who has a Draw Mortgage can rest easier, because they have Title to the home as soon as the funds are allotted to the builder. This is a significant difference, because not only is their deposit secured, but they also own the home up to whatever stage it has been completed to. This is not the case with Completion Mortgages.
As the build of the new home progresses, draws from the approved mortgage will be made in stages:
- When the home reaches foundation or framing
- When siding or drywall installation are in place
- Once the interior finishing’s begin to be installed (flooring, doors, etc)
- And finally, when the home is complete
To ensure work on the home is completed as required, third-party (lender) inspections are made at each stage to ensure everything is on track and completed. The build has to pass each inspection before the next draw will be permitted. This assures that the homeowner only pays for a progressive build.
There are even some builders, such as Parkwood Master Builder, who will pay the Draw Mortgage interest and any associated costs, such as legal fees, associated with this mortgage. Will the builder you may be interested in do this for you?
When building a home with Parkwood Master Builder and using a Draw Mortgage, the homeowner endures no extra cost. Parkwood is happy to provide homeowners with full coverage of any inspection fees (as required), legal fees (if their lawyer is used), as well as pay any accumulated interest or insurance on the mortgage up until possession.
Knowing that the financing is in place throughout the build process can provide a lot of peace of mind and allow the homeowners to relax while dreaming of living in their new home, whether it is a Parkwood home in Edmonton and vicinity, or otherwise.
All that is left to do is to get packing!