Here are the 3 option available when considering a lot purchase & construction build:
1) Purchaser of the lot obtains an unconditional mortgage approval �
This encompasses the financing of a lot purchase and the cost to construct
all under the umbrella of 1 mortgage
Benefits
-A construction mortgage rate of interest is cheaper to finance than a
lot-loan (and can be applied for the lot purchase as long as there is a
construction contract in place)
-Avoids a situation where a purchaser may have the means to finance the lot
but not the construction of their house
-Purchasers can finance the lot purchase and construction (therefore a
builder doesn’t have to finance the purchase until completion date; instead
the builder simply gets paid in construction draws as the construction
proceeds). This typically how a construction mortgage works when you hire a
contractor to build for you
-Purchaser can finance as much as 95% of the construction cost via CMHC
-Much more cost friendly for the buyer
Drawbacks
-In the event a purchaser requires their down payment from the sale of the
existing home they need to be organized and have their home sold prior to
making an offer on a lot (unless they have the means to finance a lot and
construction while keeping their existing home)
2) Purchaser buys the lot with cash or takes on a lot-loan, prior to construction
Benefits�
-purchaser can own the lot indefinitely without having to build (Subject to
municipal guidelines)
Drawbacks
-purchaser has the additional legal cost of purchasing the lot now and the
legal cost of registering a mortgage at a later date
-lot loans are much more difficult to approve for financing based on a
purchaser conditioning their construction contract on the sale of their home
(unless they can afford to carry the lot loan and an existing mortgage). The
interest rate on a lot loan is higher than on a construction mortgage.
3) Purchaser refinances an existing property to purchase the lot
Benefits
-No pressure to sell existing home right away
-Money can be borrowed at regular mortgage rates
-Lot is owned F&C (purchaser could make a subject free offer; no condition
to financing)
Drawbacks
-Potential tax concerns
paul.hudson@rbc.com Paul Hudson | Mortgage Specialist | RBC Royal
Bank Squamish & Whistler | 38100 Second Avenue, Squamish, BC V0N 3G0 |
