Draw vs. Completion Mortgages: What’s the Difference?

February 22, 2024

When embarking on the exciting journey of building your dream home, understanding your financing options is critical. In Canada, you’ll likely encounter two main types of mortgages for a new home build: draw and completion. These are different from traditional mortgages and the one you choose will be largely based on your financial situation. 

In short, a draw mortgage provides funds in stages as construction progresses, offering flexibility and ensuring home builders meet certain milestones. On the other hand, a completion mortgage sidesteps the incremental inspections, providing the total loan amount upon project completion, which could mean less red tape for you.

This article will cover all of the important details of a draw vs. completion mortgage, helping you make an informed decision that aligns with your financial landscape and personal peace of mind – so you can focus on the joy of watching your personal haven come to life!

The Basics of New Construction Mortgages

A new construction mortgage is different from a traditional mortgage, and as you take the first steps towards crafting your custom home, recognizing the nuances between a draw mortgage and a completion mortgage can be your roadmap to a smoother financial journey.

Picture it like this: A draw mortgage is like having a financial companion who walks with you through each phase of construction. Funds are disbursed in intervals – often at critical points such as after the foundation is laid, when the roof is up, and upon interior completion. This approach means builders must pass inspections before receiving additional funds, ensuring your investment is protected every step of the way. Plus, you only pay interest on the amount drawn so far, which can add up to considerable savings during the build.

On the flip side, the completion mortgage is akin to a congratulatory handshake once your home crosses the finish line. It’s the perfect match for those who prefer to tie the financial loose ends after all the dust has settled. This mortgage type requires payment only after your home is completely built, simplifying your financial obligations to a single transaction. 

Draw Mortgages

Diving into the dynamic world of a draw mortgage loan, it’s essential to understand that this option is not merely about financial transactions—it’s about building a relationship with your future home, step by step.

With the safeguard of periodic inspections and a payment plan that mirrors your home’s construction, draw mortgages align precisely with your needs, providing peace of mind. Let’s unpack the particulars, so you’re fully equipped to navigate this journey with confidence and clear expectations.

How Draw Mortgages Work

When opting for a draw mortgage, expect a structured yet dynamic financial plan tailored to match the pace of your home’s construction process.  A draw mortgage disburses funds in specified increments – contingent upon the successful completion of predetermined construction phases. This serves as a reassuring checkpoint system for you, the homebuyer, offering a safety net that ensures funds are utilized appropriately and effectively.

For instance, the initial draw might occur once the foundation is complete. Subsequent draws typically follow after other significant milestones, such as framing completion and the installation of the interior drywall. It’s a partnership where your lender invests in the tangible progress of your property, prompting accountability and precision from your builders. 

This partnership, inherently, instills a sense of confidence and security in your investment – key emotions during what can be an exhilarating yet stressful time. Moreover, with a draw mortgage, you’re only charged interest on the amount drawn to date, not the full mortgage amount, cushioning your budget and granting you the financial breathing room to make savvy, calculated choices for your future home.

Remember, a draw mortgage is not a hands-off affair; it’s a financial journey where you become an active participant in the construction process. It also means you should be prepared for the schedule of inspections and draw requests that come with this territory.

Pros and Cons of Draw Mortgages for New Home Buyers in Canada

Draw mortgages are great for homebuyers who value transparency and control over their financial commitments. One of the main benefits is the level of financial flexibility you gain. With payments synchronized to construction milestones, you only pay interest on the money you’ve utilized, not a lump sum sitting untouched. This means more cash in hand for you during the building process – cash that can go towards customizing those kitchen countertops you’ve been eyeing or perhaps even making the first few mortgage payments.

Of course, no financial product is without its challenges. For some, the periodic inspection and approval process inherent in draw mortgages might seem daunting – a test of patience in the marathon toward home ownership. While interest payments might be lower during the construction phase, this process does require you to juggle rental accommodations until you reach possession day. If this isn’t your first home, you may also have to juggle buying and selling a house at the same time

Remember, the choice of a mortgage is more than a financial decision – it’s a lifestyle choice. Draw mortgages might not be for everyone, but for the detail-oriented and budget-conscious, they represent a golden opportunity to build your home with financial savvy and security.

Completion Mortgages

Transitioning to the concept of a completion mortgage loan, imagine crossing the threshold of your newly built home, knowing all financial negotiations are already settled. Completion mortgages celebrate the moment of culmination, where the only task left is to turn the key and step into the comfort of a project fully realized.

We understand that some homeowners prefer this straightforward financial path, relishing in the simplicity it offers. Let us guide you through why a completion mortgage might be the beginning of your hassle-free homeownership journey.

How Completion Mortgages Work

With a completion mortgage, the financial details are as straightforward as they come – no incremental payouts, no recurring inspections, just one transaction that takes place when your home is fully constructed and ready for you to move in. For new home buyers in Canada, this single-step financing option releases the funds on the day you take ownership, eliminating the guesswork and giving you the clearest financial picture from day one.

Its simplicity is its charm; as you watch your house take shape, you can breathe easy knowing your monetary obligations are on pause, allowing you to allocate resources elsewhere – like feathering the nest or stashing away a little extra for those unforeseen life moments. This is not just waiting for the keys; this is strategic financial planning, giving you the breathing room to plan, save, and even earn on the finances that will eventually go towards your dream home.

While the builders work, your money is working for you, collecting interest in savings or investments, until the possession date. This means by the time you’re ready to furnish your new home and host that inaugural housewarming party, your finances are as primed and polished as your brand-new living room.

Pros and Cons of Completion Mortgages for New Home Buyers in Canada

The alluring charm of a completion mortgage lies in its simplicity and predictability. For those who value a straight path, it’s unmatched. By deferring payment until your home is move-in ready, the completion mortgage minimizes financial stress during the construction phase. Think of it as financial peace of mind; while your dream home is expertly crafted, you’re free to marshal your funds without the pressure of immediate payouts. It’s an ideal setup for the meticulous planner who thrives on certainty and a well-mapped financial terrain.

However, every rose has its thorns, and completion mortgages are no exception. The full amount of the mortgage isn’t due until completion, which may sound like smooth sailing, but it does mean a heftier payment waiting at the end of the construction process.

For some, this might stretch budgetary comfort thin, creating a scenario where financial flexibility is limited. Plus, without the milestone check-ins characteristic of draw mortgages, you’re placing a lot of trust in the building process to run smoothly without your intermittent financial oversight.

Do You Have A Choice?

Now that we’ve explored the pros and cons of both draw and completion mortgages, you might be wondering – do I have a choice? The answer is yes! As a homebuyer in Canada, you have a variety of mortgage options available to you. It’s important to weigh the advantages and disadvantages of each type before making a decision. 

Consider your financial goals, timeline, and risk tolerance when choosing between draw and completion mortgages.  And don’t be afraid to consult with a mortgage professional before making your final decision.

As a new home buyer in Canada, it’s important to understand the different mortgage options available to you. While draw mortgages offer financial flexibility and the opportunity to save on interest during construction, completion mortgages provide simplicity and certainty. 

Ultimately, the choice between a draw or completion mortgage will depend on your personal financial goals and preferences. But no matter which path you choose, Sterling Homes is committed to providing you with exceptional customer service and support throughout your home-building journey. So don’t hesitate – let’s work together to make your dream home a reality!

Originally published November 12, 2018, updated February 22, 2024

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About the Author:

At Sterling Homes, our mission is to provide the opportunity for affordable homeownership without compromise. Over the last 70 years, Sterling Edmonton has quickly become one of Edmonton’s most popular builders. We bring more than seven decades worth of exceptional customer service, superior design and unparalleled craftsmanship to the greater Edmonton area. As a member of the Qualico Group, Sterling Homes focuses on greater Edmonton’s finest family communities, while being able to offer some of the region’s most family friendly prices thanks to volume purchasing power for materials, trades and land. This has not only made Sterling one of Edmonton’s bestselling, move-up builders, but also one of the industry’s most respected home providers. It is through our uncompromising commitment to our customers that we proudly deliver the Sterling Advantage – that’s why each and every home we build includes a 10-year home warranty, a completion guarantee and new home warranty excellence rating. Our Advantage is our pledge that, when you build your dream home with Sterling, we will deliver a timely, well-built home you’re sure to enjoy for years to come.

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