Len 00:02
Welcome. My name is Len Lane, and I am the founder and president of Brokers for Life Inc., and we are Dominion Lending Centers in Western Canada. The topic of our podcast will be about what we consider to be Real Life Mortgage Solutions.

Len 00:20
Welcome back. Today, we’re going to talk about building a home lots of different scenarios that we’re going to talk about, ranging from starting out with an empty lot to actually doing a private build and building it yourself. My guest today is Leslie Kearns. She is a broker experience specialist with Alberta Treasury Branch. Welcome.

Leslie 00:41
Thank you for having me.

Len 00:43
We’re in the spring market. Things have picked up considerably, it seems or feels like, anyway, but a lot of the calls, of course, we get this time of year are for people who are looking to build the house back a little bit before that the you know, obviously some different scenarios walk us through how each one is a little different, and what kinds of requirements you guys look for for these scenarios? So clients buying bought a lot, and now they’re going to get a certified home builder to build it, but he needs to draw a mortgage. How does that scenario work?

Leslie 01:16
So if the clients already own the lot and they own it outright, we can look, look at using some equity from that land that they own outright as per title, and they could take up the loan to value amount out if they needed some more cash up front for down payment for the builder. So that loan to value is based on the location and the purchase price or the value of that lot. When you already own that, the clients already own the lot, and they have a third party, new home builder going to build their home for them. They would put them together in the sense of the purchase price is the value of the land plus the value of the build. So if the land is 200,000 and the build is 800 you have a million dollar purchase price, but you would have $200,000 of equity already in that land piece. Or if you wanted to take some out to give the builder, because they want some cash up front, we can look at doing that as well. That is dependent on an appraisal, it can be insured, and it can be conventional either way. So the loan to value on that million dollar home or property that they’re going to have would be based on, again, location, on what the loan to value can be when we’re building it. Typically conventional mortgages are 80% but it might be less, let’s say, if you’re in more a rural area versus an urban area like Calgary or Edmonton. When they’re going to do this, what happens is, we need that contract from your third party builder. We need it to be signed by all parties. It needs to meet ATB requirements. And when I say ATB requirements, the biggest thing is it’s new home warranty, as per the Alberta warranty that we have to have. It’s a fixed price contract. It cannot be a cost plus. So a cost plus is the builder saying we will build your home now for 800,000 but if costs for contractors or materials go up, we may charge you 8%, 18% we will not do the cost plus, because it becomes very fluid on what that money is that we’re trying to lend you, and it can become a real mess, is what it can because you’re approved for a certain amount when we when we start that draw mortgage. So in this contract, the builders will put out what they would like to see for their draws. At ATB, we’ll do four draws. The draw amount is dependent on the purchase price of what we’re building. How much is down payment? So basically, what your finance amount is. So once we look at that, we have the four draws. The cost for that is $650 which comes off your first draw with the solicitor. And those, that $650 includes draw 1, 2, 3, and 4, and that is when your builder is requesting to have funds when they get to each stage of those draws. The draws are pretty specific in what they need to be done. We have a very specific draw stage on minimum amounts and things like that. We actually have just restructured it to show a minimum amount. That minimum amount would be based on not doing your first draw and doing draw one and two together. If they do the inspections, you can get more money for that draw as long as they have met what we have to be on our draw form.

Len 04:51
Right. So two things there, I think stand out is the fixed rate contract. So if they are. Building with a fixed rate contract, and do add things that then becomes the client’s responsibility to pay separately, right?

Leslie 05:08
It does become the client’s responsibility to pay those so basically, what happens is those clients would be then giving an addendum to their draw, to their build to the solicitor, and they’d have to come up with those funds. If not, we can’t, we could go back, but you have to be renewed like you have to be reapproved. You’re basically starting over, and you have to be reapproved. So you should be quite certain what you’re going to build and what it looks like with your specifications, everything else that’s coming in.

Len 05:38
Yeah, and that’s what I’ve seen lots of times where it’s now you’re $100,000 more, and you added some nice cabinets and a few other things, but you forgot that you couldn’t add those into your mortgage. So, so the builder world a little bit different. My favourite ones to do, of course, are somebody’s buying directly from a builder, and the builder needs to draw a mortgage. That, how easy is that process?

Leslie 06:03
That one is easy too, in the sense of, so when you send in your contract, it’s going to have on there the cost of the land plus the cost of the build, because this builder is selling you the lot or the piece of land, plus the build. So basically, we’re going through there. It’s all one, and we can do it the same as we’ve done the last ones. They’re typically not hard either way, whichever way you want to go, but it’s not, it works out the same, same way as before.

Len 06:36
Right. So if you’re thinking of going that road, it, it’s saves you a lot of headaches, I think, in the fact that it is a fixed rate contract rate from day one, it’s already New Home Warranty approved, because that’s what the builders requirements are, to be a new home warranty of some kind member and that, of course, you know, selection allowances and things like that are already built in into the actual contract. So it’s a pretty smooth way to do it. So let’s go back to the draws a little bit. What kind of percentages? So we said in the first one, if you own the lot, you can take some money from that. Is that a is that considered part of a first draw?

Leslie 07:19
It’s not. So we actually can do the four draws, plus a specific. So the specific would be, once you meet with your your solicitor, and we’ve got everything done, we’ve got it solicitor instructed from your broker, we would go in and have all the documents signed, and your lawyer would ask for that specific advance that you’re taking from the land you own to give to the lawyer, to give to the builder for that down payment portion, if you wanted more cash up front to go into this. So you’re taking the equity, you’re still having the equity, whether it’s cash or sitting there as part of the land.

Len 07:53
Right. Yeah, and that that’s been part of one that we’ve been working on. It’s go by the lot, because they don’t own it yet, so they had to buy it from the developer. And so it created an extra step in in that we had to do the mortgage on the land, so that they did own the land and and then do the construction and combine the two later, right? So makes a little bit of a difference. So as long as it’s not part of the draw money, then that gives them some advantage and and it’s equity that goes right into the down payment.

Leslie 08:25
Correct. And it does, so when you have a land loan, whether it’s with ATB or somewhere else. So you don’t own that piece, that lot, or that piece of land right out, so your title isn’t free and clear. If you owe some money on that, what happens with that is that we’ll do that specific advance to pay out that loan, that land loan, to bring the mortgage all together and to bring it on title with that so at ATB and anywhere else, if we’re paying out a land loan, again, it is based on the location and the value of that land will pay up to that certain amount of loan to value. The best part about this is that you have 100% of that amount that that piece of land is worth. So if you had to pay out 75% of $100,000 loan, we would pay out the $75,000 but you still have $25,000 worth of equity, because that whole piece of land is worth the amount that you you either purchased for, because if you just purchased in the last couple months, we’re going to use that purchase price. If you purchased it a year or two ago, we’re going to want that appraisal to show us if that land value has gone up and you may actually have more equity into it.

Len 09:35
Right. Hadn’t thought about that. I see I have had a few over the years where they bought the lot and didn’t build for a couple of years. And again, depending on where that that usually seems to happen out in the smaller towns. In the case I’m thinking of, it was by Carstairs, and it was so it was little ways out of out of the city, and the land had gone out. Not not huge numbers, but another $25,000 so it did help when we actually got to the point in building. So you can still buy from a builder. But what if the builder is not a draw builder? There seems to be a big difference between Edmonton and Calgary. When that happens, the builders in Edmonton, many of the ones I worked for over the years were were all draw builders. They worked off the banks, money and the and the person’s money to get, you know, get to a point where they do that. In Calgary, they seem to be flush with a lot more money. I don’t know the builders are bigger or what, but a few of them are, but they like to do what’s called a completion mortgage. Maybe explain how that process works. And let’s talk about the rates on how that works as well.

Leslie 10:39
So, with the completion mortgage, that is one where your builder is going to take all the costs, and they’re going to pay for your build right up front. So they’re not asking for money, except for their 10% or 15% down payment that you’ve agreed upon on your contract. But they’re going to take this build, they’re going to finance it through the whole thing, and then at the end, when you were ready to take possession, they would provide you with the possession letter that would come to ATB Financial through your broker. And we would then solicitor instruct that file for you to go sign your documents. And then the solicitor would then request the funds that you have been approved for financing on your mortgage and release it to that builder. So that one’s pretty, pretty easy, in the sense, you’re just waiting for your home to be built and then it’s paid out when you’re going to take possession.

Len 11:33
So draw mortgage, okay, so draw is made capped foundation, say, so at what point during that process does the client’s rate get locked in for them?

Leslie 11:47
So with a draw mortgage, your rate that you’re going to have is our five year variable rate. So whatever five year variable rate is at the time throughout your build, that’s what you’re paying. So right now, our variable, I think, at this point for five year variable, is prime minus point six. So you’re paying that amount on the draws as they go. You’re not paying it per se, but it’s coming off each and every draw that comes out. So at the end of this draw mortgage, you may have interest to pay if the interest is not being paid by your builder, as per your contract. So in your contract, and that conversation you have with your builder, who’s paying for the interest in between these draws, is it the client, or is it going to be the builder? If it’s the builder, you’re going to be flush at the end. If it is you, that you’re going to pay the interest, you will have a lump sum payment at the end to pay the interest so that the builder is flush with payment in total. Because we don’t go and I don’t say the word chase money, or we don’t want to bug you throughout the bill to pay for anything, because you’re you’re working towards getting this home. So at the end, you’ll pay your solicitor the amount that would be owed interest over the that 18 month time frame that we allow for this home to be built.

Len 13:06
Right. I don’t know if we’re back at 18 months yet again or not. I haven’t, I haven’t looked lately.

Leslie 13:14
It depends. We were, for sure, just because we were, there was issues with contractors, there was issues with supply and demand. Um, we give the 18 months because it just gives a better lead way for clients to have in the builders, to have some extra time. And that 18 months also includes the time that you started the application. So if you start the application in April, here to 2025 you have 18 months to be taking possession. If something goes wrong, you know, supply and demand. We’ve seen some that have, you know, caught on fire. You can have the broker can send in and ask for an extension to that 18 months, which is great, and then you’re just still paying interest and not paying mortgage payments while this home is still being built, and you don’t have possession.

Len 14:00
Right. Exactly. Okay. So completion mortgage, no payments made to anybody throughout. How does the rate hold work on that?

Leslie 14:10
So it depends. So on your contract, it’s going to have a 2d determined date of when you’re taking possession. So they do have an approximate date on when their build is going to be done. So if that’s six months out, your broker can ask for the zero to six months fixed or variable. You can go fixed or variable with the completion. Or if it’s six to 12 months out, or zero, up to nine months, 12 months, we’ll offer those rates. The best part about that is this because, because this application has not been solicitor instructed for you to go sign documents, it’s still a live application with ATB, and you can actually have your broker request the rate drop down if the rates are lower for that zero to six, even though you requested a nine month. With the draw mortgage, you’re paying your five year variable until you take completion. And at completion, you can choose to either stay with the variable or you can lock in at this point for a five year fixed because at the time of completion and you take possession, that is when your term starts, whether it’s draw or completion.

Len 15:22
You know, I always thought that with the draw and being a variable, that that’s a great way to do it in this particular market. I’m sure, a couple years ago, it wasn’t so great to watch the interest rates go up and the variable go with it. But you know that those are the choices you have. I guess you know to get it set sooner or later. So some of the most common issues you see when it comes to construction mortgages.

Leslie 15:48
It probably is the draw structure and the frustration sometimes from the builders, they’re looking for more funds to be put into the build. But at ATB and I probably with most financial institutions, there’s a marketability risk on on funding, too much money, in the sense that they have to, the builder has to have some skin in the game, some finance in the game, to want to get this done and not just be fully funded with the client’s money. So what we’re doing there is we’re obviously like, we’re trying to protect the client, to ensure that this home does get built in the time frame that they’ve requested, like have been promised for the amount of money that they were told it was going to cost to build. So we just want to ensure the clients are safe for that marketable risk, that they don’t run into the builder having all this money and then not finishing their build.

Len 16:36
Draws. There’s two terms that we hear quite often, and that’s cost to complete and or being paid on the amount that’s according to the schedule of what’s being already done. There are two different terms. There, one being, it’s still 65% to more to go, so you’re getting less money. And the other one being, it’s actually, you know, say, 50% done, so 50% of the mortgage has been advanced, is that that the standard for ATB to do it that way?

Leslie 17:03
Yes, we pay on the cost to complete and on a cost that has completed. So on our draw form that you send in when they’re requesting those draws there, there’s the tick boxes for each draw that they have to be. There’s the odd one, like when you’re getting to draw three and four, maybe they did the outside versus doing something inside. So we’ll pay out that money that they’ve completed it at, up to that certain amount that we have on that form that you can share with your clients to show how it looks, and even with the builder, so they absolutely understand where they’re at and what they need to have done required right to move forward.

Len 17:47
Excellent. Modular homes. Does this qualify in your build category?

Leslie 17:54
We do do modular homes, but typically what happens with these ready to move homes, modular homes, mobile homes, the companies that build them have a contract to do the build, to do the foundation, to do the delivery and setup and to do the skirting. So that’s their completion of a ready to move home. The next thing you need in there is you need your contractors come out and set up all your utilities, your plumbing, your electricity, your heat, all that stuff has to be set up. Typically, the RTM home providers don’t have those contractors, so they turn into a self build, because the clients that are building or doing this have to actually engage and get their own contractors to come out. If the RTM home has one contract that does it all. We can absolutely consider it with our broker channel. We do have other options in house, but I’ve seen them go either way. But typically, I would say 88% to 92% end up in a self build situation.

Len 18:59
Right. Yeah, and that we’ve run across that in the past where, especially in rural applications, where they need a well, they need a septic system, these are two different people already that they have, right? Or they want to pour a pad and do something like that, or put in the foundation themselves and wait for the RTM to show up. You know, once you start to factor in half a dozen different contractors. It really does get to be that the owner is actually doing, doing is then the builder. So self build, of course, right which.

Leslie 19:30
It’s self build in their own, their own contractor, because they’re having to ensure to have this ready made home, to take possession. It’s, it’s another thing in ATB is one’s a little different, and I’m not sure about other FIs that do these. The delivery cost for these RTMS cannot be included in the contract. It adds no value to that particular property, so the clients have to pay for the delivery cost out of pocket. It cannot be included in the financing.

Len 20:00
I didn’t realize that there’s another stage to that that we’ve run into over the years too, is, of course, when it gets to site, if it’s on the truck and the money hasn’t all been forwarded, they won’t unload in some cases.

Leslie 20:16
Oh, wow.

Len 20:18
We had one come all the way out to Vavenby, BC, from Quebec, two big truckloads, but somebody missed the point that, yes, they needed to cheque to take the building off of the truck. So they scrambled. Found a private lender. Fixed that up. Got it off the truck.

Leslie 20:33
Yeah, these ones are typically hard to do, just because the contract usually does not qualify to ensure that there’s no marketable risk for the clients or ATB or another financial institution to ensure that this is done correctly. I know with an RTM home, if we can get it done, we have three draws. And basically, when they come to deliver and put it on that foundation, whatever it is, they’re going to already have 86% so we’re not going to release that last 14% until it is literally possession ready. You’re walking into takeover, and that’s your last inspection. And if you don’t have utilities hooked up, it’s, it’s a non marketable property at that point?

Len 21:19
Yeah. Excellent. Okay, that probably covers a vast majority of what we would usually see. I’m not going to get into the ones we don’t see. I’ll do that in the next section myself, but I really want to thank you for your time today. Leslie, that great information for not only for the team and the brokers that are listening in as well as the public. So thank you very much.

Leslie 21:42
You’re very welcome. And if you have any questions, reach out to Len. He’s awesome, and he can reach out to me if you have one that’s a little sideways, thank you.

Len 21:54
So great. Conversation there with Leslie about builds, going through the banks, our go to has always been ATB and service, the local credit union seemed to do that better than some of the big banks. Over the years, Scotia, a few others, have had a build program, but it usually goes by the way, because because of their setup internally, I guess where it has to end up with a branch. So dealing with a broker in a branch, as we know is, is always a challenge. So we still get a lot of calls from clients who say, I want to build my own house, and that that’s always a great thing. And as we talked a little bit at the end with Leslie, it’s there’s that component of building your own house that even if you have a general contractor. There’s still a lot of things outside of that scope of just building the house, whether that’s you got to add a well, if you’re in the countryside, you got to put in a septic system of some kind. You may have to build a road, you have to put in culvert, you got to get clearance from the county to put in the culvert. So there’s a long list, in fact, the spreadsheet that I give clients most of the time when they’re talking about doing a build themselves. It’s a checklist of things that you need quoted and that there it entails everything from exactly that putting the culvert in to get a road into your property. If you’re in the country, digging a well, drilling a well, whichever way you have to go. I think out in the west, we pretty much drill them all these days. In the Ottawa Valley, we used to dig them. But there’s, you know, a lot of concept, and it’s over 75 different units at least, that you need a quote for. And that’s the actual terminology, is that you need a physical, written quote for every one of those items to present to a builder. So in most of these programs, we deal a lot with a company called Cedar Peaks Mortgages out of Calgary. They’ve done a great job over the years with construction job mortgages. They they have a program in place that, you know, deals with the equity. They’re set up to do the interest draws and things like that. But I’ll just give you some of their general things that that you need to be aware of. Just like regular lenders, they actually only charge you interest on the money that’s been advanced, and there is no standby fee for them. You know, line item budget, as I said, it’s 75 units. So they’ll take their calculations on your quotes as well, just to make sure that they think that they’re in line, because they’ve been doing it a long time. So they they have a pretty good idea what things should cost. There’s actually a book out there that will tell you what the estimated building cost should be. I think it gets, I hope it gets updated every year. I’ve seen it a couple times with private lenders. You got to have your own money in first so if you’re build with the land and everything, say you own the land, the land’s worth $150,000 you know, they’ll give you a portion of that towards equity, and consider that to be cash into the project, digging a well, doing things like that. Those are 15,000 $20,000 items these days or more. And you have to, you know, have some of that cash in, in, in upfront before they will ever give you a draw which makes sense, put your skin in the game and and away we go. Right. New Home Warranty. People don’t realize that new home warranty is not a inexpensive thing to do. You can get a provincial exemption for it, for building your own home, but one way or the other, a new home warranty certificate, and everything costs about $10,000 and that’s money that you need up front before you ever start to build. You can’t get it at the end, because part of new home warranty is actually inspecting the work as it happens on your property. Right? Land purchases, they’ll they’ll do that for you as well. Where it’s equity takeout, if you own the land upright, up to 70% of the loan to value at the foundation stage, they’ll consider that 15% complete that lock up and lock up is where the windows and doors are in the property or in the house. And it’s buttoned up. It was the construction term for that. And the roof is on, shingles run and windows, doors are in place. It’s just framed out inside. That’s 45% complete. Drywall ready to paint. So that also means insulated and a whole bunch of other things done, including the electrical run and all of that stuff in the walls. You’re at about 65% of that point pre completion draw they would do that. It’s called interim at about 80% complete and then final completion. So 97% is what the is considered to be at that point, you can get an occupancy certificate, and that needs to be issued before you can actually move into the house as well. So lots of things that have to come into play there right application process for both of these are the same, where we’re going to see your credit, we’re going to make sure you qualify for the mortgage when you’re done, you know, it’s confirming sufficient funds up front as well as sufficient funds and or equity, preferably a combination of both. You still have cash on hand to get moving. You know, fully exit executed copies of the purchase agreement for the land. You’ve got to make sure that you have building plans. You have to have the specifications done, and you have to have a building permit issued. Line item budget, like I said, 75 to 80 items, maybe more if there’s extras, things that have to be done. I’ve seen the overrun happen quite often. If you have a construction or a project manager in place, that’s great, but if you don’t, but I actually want to see that you have some type of skills, that you’ve maybe been around a builder too, and that you understand the difference between a rim joist and a hip joist. And somebody want to maybe Google both of those if you want. You know knowing that the construction process will work and you’re not just going to rely on other people’s expertise to complete the complete the building.

Len 28:07
Drawings. So when you have drawings, we can do a, what’s called the desktop appraisal. So drawing specifications, all of that good stuff in place, we can actually get to a value of what your finished product is going to cost. So it’s, uh, it’s always a big endeavor. I’ve only had a few over the years do it successfully on their own, most in the end, when they realize the cost of interest and all of those things, there’s a lot to be thought about. To tackle a construction job yourself a How much time do you have to do it? You can’t do it on the weekends and evenings, because that’s not when your trades are going to be there. You’re going to be seeing stuff after the fact. And that’s never, never a good thing as well, right? So, so build construction, definitely an option, lots of different possibilities. Whether we do it through ATB service, there’s a couple of good programs there to give you enough time to get started and get into the ground and get a draw done at a reasonable pace. The other part of that would be that there, if not, and one of the things that we always recommend to, is don’t start a build without having finance in place every year, same thing, probably about June or July. I’ll have someone call me and say, Well, I started my house in the spring. And I’m going like, Oh, good. So how much financing did you have in place? And if the answer is none, then we have another problem. If you start a construction project and you do not have the financing in place, the banks will not do that for you. They don’t want a half finished house. And they’re not in the construction industry, not directly anyway. So that is a position where we go from that to actually getting you a private mortgage, perhaps with cedar peaks, perhaps with some of our other builders, other financers that do build, you know, to complete it. And. To make sure that the house gets done, even when you’re building it yourself, we’d like to have an exit strategy. So that extra strategy means, when the house is done, will it have the value in it to to basically refinance it, because that’s what it becomes at that time. So you have to be able to get financing for at least 80% of the finished mortgage amount. So lots of things to think about. We’re part of this is training for our team as well, so we’re well versed in construction, and we’re more than glad to help anybody out that that has questions, and maybe point you in the right direction, if it’s not with us, then then possibly doing something directly with the banks may be your other option. So anyways, thanks for listening today. We’re glad that we can hopefully help you out and have a great day.

Len 30:50
Thanks for listening today. I hope you found the information that we provided to be useful in your mortgage journey. And remember, you can always find our associates at www.brokersforlife.ca/associates. Have a great day.