A construction loan in Ontario, usually called a draw or progress mortgage, releases money in stages as your custom home is built rather than in one lump sum. The lender inspects the site before each advance, and you typically pay interest only on the funds drawn so far. Once the home is complete, the loan converts to, or is replaced by, a regular mortgage.
For a construction loan Ontario homeowners can rely on, preparation matters as much as the rate. This guide covers how draws work, what lenders expect, and how to plan around Ontario’s construction rules.
Key takeaways
- Draw mortgages advance funds in stages tied to completed, inspected work.
- Borrowers usually pay interest only on the amount drawn during the build.
- Expect to contribute meaningful equity, often 20% or more, and to spend it early.
- Ontario’s Construction Act requires a 10% holdback, which affects each draw.
- A fixed price contract, approved permits and a licensed, Tarion-enrolled builder make approval easier.
- Budget a contingency and carrying costs on top of the construction price.
This article is general information, not financial or legal advice. Lender terms vary, so confirm details with your lender, mortgage professional or lawyer.
How a Draw Mortgage Works for a Custom Home
A standard mortgage funds a finished home on closing day. A custom home does not exist yet, so the lender cannot lend against its full future value up front. A draw mortgage solves this by approving a total loan amount based on the projected completed value and releasing it in instalments as construction progresses.
Interest-only payments during the build
Most construction mortgages in Canada charge interest only on the amount advanced so far. Early in the project, when little has been drawn, payments are modest. They rise as each draw is released. Some lenders let you capitalize interest or pay it from a reserve, but many expect monthly interest payments from your own cash flow, so plan for that.
Inspections and appraisals per draw
Before each advance, the lender sends an appraiser or inspector to confirm the work claimed is actually complete. The lender then releases funds based on the percentage of the project finished, minus any holdbacks. Inspection fees are often charged to the borrower for each visit, either billed directly or deducted from the draw.
Draw timing matters. If an inspection finds a stage is not quite finished, the advance can be delayed, which can slow trades who are waiting to be paid. Builders with tight construction management schedule work so each milestone is genuinely complete before the inspector arrives.
Typical Draw Schedule for a Custom Home
Every lender sets its own draw schedule, and the number of draws usually ranges from about three to six. The table below is an illustrative example only, not a standard any lender is bound to. Your actual stages and percentages will come from your lender and your contract.
| Draw | Typical milestone | Illustrative share of construction budget |
|---|---|---|
| 1 | Demolition, excavation, footings and foundation complete | Often 10% to 15% |
| 2 | Framing, roof, windows and exterior doors (closed in) | Often 20% to 30% |
| 3 | Mechanical, electrical and plumbing rough-ins, insulation and drywall | Often 20% to 25% |
| 4 | Interior finishes: millwork, flooring, kitchen, bathrooms | Often 15% to 25% |
| 5 | Completion, occupancy and final inspection | Often 10% to 15% |
If you are buying land as part of the project, some lenders advance funds for the lot first, and others expect you to own it outright or largely with your own money. For a knockdown-rebuild on a lot you already own, the land usually becomes the main source of your equity.
Down Payment and Equity Requirements
Lenders view construction as riskier than buying a finished home, so equity requirements tend to be higher and more front-loaded. Many lenders want borrowers to contribute 20% or more of the total project cost, and some ask for more on large or complex builds.
Mortgage default insurance is only available on homes priced under $1.5 million, so most luxury custom home projects in Toronto rely on conventional financing. That generally means at least 20% equity.
Equity can come from several places:
- The value of land you already own, net of any existing mortgage
- Cash savings or proceeds from the sale of another property
- Investment assets you are prepared to liquidate
- A gift or family contribution, which lenders usually document with a gift letter
Many lenders apply a “cost to complete” test: your own funds go in first, and the lender only starts advancing once it is satisfied there is enough money left in the loan to finish the house. To see what realistic budgets look like by price point, read our breakdown of what $1M, $2M and $3M gets you in Toronto in 2026.
Construction-to-Permanent vs Separate Construction Loans
There are two common structures for a construction mortgage in Canada. The right one depends on your timeline, your existing mortgage and how much flexibility you want at the end of the build.
| Feature | Construction-to-permanent | Separate construction loan |
|---|---|---|
| Approvals | One approval and one set of legal work | Two approvals: one for the build, one for the end mortgage |
| At completion | Converts to a regular mortgage with the same lender | Paid out by a new mortgage, possibly with a different lender |
| Main advantage | Simplicity and certainty | Freedom to shop for the best long-term rate |
| Main risk | Less room to negotiate end terms | Re-qualifying when the home is finished |
Major banks, credit unions and private lenders all play in this space, and their appetite for custom builds varies. A mortgage broker who regularly handles construction files can save you time comparing them.
Financing a Knockdown-Rebuild: Home Equity, HELOCs and Bridge Loans
Many Toronto custom homes replace an existing house on a lot the family already owns. That creates both an advantage, significant land equity, and a challenge: where you live, and how you carry costs, while the old house comes down and the new one goes up.
Using existing home equity or a HELOC
If you own your lot with substantial equity, a lender can often count that equity toward your contribution. Some owners use a home equity line of credit to fund design, permits and early costs before the first draw. With federally regulated lenders, the revolving part of a HELOC is generally limited to 65% of the home’s value, and total secured borrowing to 80%. Keep in mind the value used may change once the existing house is demolished.
Bridge financing
If you are selling another property to fund the build, a bridge loan can cover the gap between paying for early construction and receiving your sale proceeds. Bridge loans are short term and usually more expensive than a mortgage, so they work best when the sale is firm.
Still deciding between a major renovation and a full rebuild? Our comparison of luxury renovation vs custom home build costs in Toronto walks through the numbers.
Ontario's Construction Act: The 10% Holdback and Lien Periods
Ontario’s Construction Act requires the payer on a construction project to retain a holdback of 10% of the value of work and materials supplied. This protects subcontractors and suppliers who could otherwise register a lien against your property if they are not paid.
Lenders build this into the draw process. In practice, each advance is often reduced by the 10% statutory holdback, which is released once the lien period has passed without claims. Under the current Act, a lien generally must be preserved within 60 days of key events such as substantial performance or completion, and then perfected within a further 90 days. These timelines can be technical, so confirm them with your lawyer.
The Act changed again on January 1, 2026, introducing mandatory annual release of holdback on applicable contracts, along with notice and payment timing rules. Builds that run longer than a year may be affected, so ask your lawyer and builder how the new rules apply to your contract.
Construction Loan Ontario Checklist: Documents Lenders Ask For
A complete, organized file is the fastest route to approval for a draw mortgage on a custom home. Lenders commonly request:
- A signed fixed price construction contract
- Architectural drawings and specifications
- Building permits, or proof they are in progress
- A detailed construction budget and cost breakdown
- The builder’s HCRA licence and proof the home will be enrolled with Tarion
- A projected construction schedule and draw schedule
- Proof of land ownership, or the land purchase agreement
- Your income, asset and down payment documentation
- Builder’s risk insurance details
Permits often drive the start date, so it helps to understand the Toronto building permit process, costs and timelines early.
How a fixed price contract helps financing
A lender’s biggest worry on a construction file is a half-built house with no money left to finish it. A fixed price contract reduces that risk because the total cost is defined before the first shovel goes in. Combined with a guaranteed completion date, it also makes interest carrying costs easier to forecast, which supports both your approval and your own budget.
Budgeting: Contingency, Carrying Costs and HST Rebates
Even with a fixed price, plan for costs outside the contract. Many advisers suggest a contingency of roughly 5% to 10% of the build budget for owner-driven changes and unforeseen site conditions. Your budget should also include:
- Interest payments during construction
- Appraisal, inspection, legal and lender fees
- Temporary housing and moving costs during a rebuild
- Landscaping, furnishings and items outside the contract scope
Our article on the hidden costs of building a custom home in Toronto lists the items people most often miss.
GST/HST new housing rebates
If you build or hire a builder to construct a home on land you own, you may be able to claim an owner-built home rebate through the Canada Revenue Agency. The CRA states the Ontario portion is available up to $24,000 regardless of the home’s value, if other conditions are met. The federal portion only applies below certain value thresholds that most luxury homes exceed. Temporary enhanced rebates have also been introduced for some projects, including owner-built homes starting construction between April 1, 2026 and March 31, 2027. Eligibility rules are detailed, so confirm with your accountant before counting on any rebate.
Frequently Asked Questions
How does a construction loan work in Ontario?
A construction loan in Ontario, often called a draw or progress mortgage, releases funds in stages as the home is built. Before each advance, the lender inspects the site to confirm the work is complete, then releases money minus any holdbacks. You typically pay interest only on the amount drawn. When construction is finished, the loan converts to or is replaced by a regular mortgage.
How much down payment do I need for a construction mortgage in Canada?
It varies by lender, but many expect 20% or more of the total project cost, and some ask for more on large custom builds. Homes priced at $1.5 million or more cannot use mortgage default insurance, so luxury projects usually need conventional financing. Equity in land you already own can often count toward your contribution.
How many draws are in a draw mortgage for a custom home?
Most draw mortgages use about three to six advances, tied to milestones such as foundation, framing and closing in, rough-ins and drywall, interior finishes and final completion. The exact stages and percentages are set by your lender and contract. An inspection or appraisal is usually required before each draw is released.
What is the 10% holdback on a construction loan in Ontario?
Ontario's Construction Act requires the payer to retain 10% of the value of work completed as a holdback. It protects subcontractors and suppliers who could otherwise register liens on your property. Lenders commonly withhold this amount from each draw and release it once the lien period expires without claims. Rules changed on January 1, 2026, so confirm details with your lawyer.
Can I use my home equity to finance a knockdown-rebuild?
Often, yes. Equity in the lot you already own can count toward your down payment, and some owners use a HELOC to cover design, permits and early costs before the first draw. Bridge financing can help if you are selling another property. Keep in mind that lenders may value the property differently once the existing house is demolished.
Plan Your Custom Home Financing With Confidence
Lenders approve construction loans more easily when the builder behind the file is experienced and the numbers are locked in. Marvel Homes Development has built luxury custom homes in Toronto for more than 30 years and offers fixed price contracts, guaranteed completion dates, in-house architectural design, project management and Tarion warranty coverage.
We regularly provide the contract, drawings and budget documents lenders ask for. If you are weighing your options, contact Marvel Homes to discuss your project and timeline.