Construction Mortgages Explained

You’ve probably thought this at some point…

“Why does no one explain how this actually works?”

You ask a builder, they tell you to talk to a bank. You ask a bank, they talk in circles.

And now you’re stuck trying to make a million-dollar decision… with half the information.

Here’s the truth: If you don’t understand how construction financing works, the process will feel stressful, unclear, and risky.

First… Your Builder Shouldn’t Be Your Banker

At Hometown, we design and build homes. We don’t finance them. Not because we can’t… but because we shouldn’t.

Same reason your realtor doesn’t finance your mortgage.

There are financial institutions for that. They handle:

  • Lending

  • Risk

  • Approvals

We focus on:

  • Designing your home

  • Pricing it properly

  • Building it without chaos

Also, something most people don’t realize… Banks prefer builders who offer fixed price contracts because it removes uncertainty like:

  • No budget creep

  • No surprise upgrades

  • No “we’ll figure it out later”

From a lender’s perspective… fixed price = predictable. And predictable = safe.

How the Process Actually Works (In Saskatchewan)

Let’s walk through a real example so this makes sense.

Step 1: You Buy the Land

Let’s say:

  • Land = $350,000 + GST

  • GST (5%) = $17,500

Total Land = $367,500

You either:

  • Buy the lot yourself, or

  • Work with us if it’s not publicly available

Either way… you need to own the land.

Step 2: You Secure a Construction Mortgage

Now your lender steps in.

In Saskatchewan, credit unions are usually the easiest to work with for custom homes.

They’ll review:

  • Your income and financial position

  • Your land value

  • Your fixed price contract

Now here’s where we’re different… Our fixed price includes everything needed to build your home. No hidden extras or unknown allowances.

Let’s Look at a Real Example

  • Build (fixed price): $1,500,000 + GST & PST

  • GST (5%) = $75,000

  • PST (6%) = $90,000

  • Total Build = $1,665,000

Total Project (What the Bank Looks At)

  • Land: $367,500

  • Build: $1,665,000

  • Total Project ≈ $2,032,500

If you already own the land, that $367,500 often counts toward your down payment.

Step 3: The Draw Process (Where Most People Get Confused)

The bank doesn’t give you $2M upfront. They release funds in stages. The typical structure is:

  • 20% at foundation

  • 20% at framing

  • 20% at lock-up

  • 20% at interior

  • 20% at completion

On a $1.5M build, each stage is about $300,000

Let’s Walk Through It…

Stage 1: Foundation

  • You pay: ~$300,000

  • Work gets completed

Then:

  • The bank sends an appraiser

  • They confirm progress

  • The bank releases ~$300,000 back to you

Sounds simple… but here’s where it gets tricky.

The Part No One Explains Properly

At Hometown, we don’t own your land. So to reduce risk and keep your project moving, we front-load the job.

Meaning:

  • You pay first

  • Then work happens

But… The bank only pays after the work is complete. So you need to cover that first stage upfront.

So How Do People Actually Make This Work?

Most clients bridge that gap using:

  • Savings

  • A line of credit

  • Short-term access to funds

Once the stage is complete, the bank reimburses you through the draw. It’s a bit of a leapfrog situation. Not complicated… just rarely explained clearly.

A Few Things You’ll Want to Know. Let’s keep this practical.

  • Appraisals happen at each stage
    The bank verifies progress before releasing funds

  • There’s a 10% holdback
    Required by law
    Held in trust (usually by your lawyer) until completion

  • You only pay interest during construction
    Not full mortgage payments yet

  • It converts at the end
    Once complete, your construction mortgage becomes a regular mortgage

Why This Actually Works in Your Favour

This system might feel clunky at first, but it protects you.

  • The bank verifies the work

  • Payments match real progress

  • Risk stays controlled

And because you’re working with a fixed price builder, your numbers stay stable, your lender stays confident, and your stress stays manageable.

The Bottom Line

When you understand how construction financing works, the entire process feels more predictable and in your control. That’s the goal. Because building your home shouldn’t feel like guessing with your money.

What You Should Do Next

Before you move forward, talk to a lender or a mortgage broker and ask:

  • How do your draw schedules work?

  • Can my land be used as equity?

  • How much cash do I need upfront?

Get clarity early because it makes everything else easier. And if your lender needs any clarification on the builder’s process, we’re happy to chat with them directly.

If you want a full breakdown of what to expect before you build…

👉 Download “7 Things to Know Before Building Your Custom Home”

It’s the guide people wish they had before they started.