If you’re one of the many Canadians choosing to build a custom home instead of buying pre-made, keep reading.
While building a house from scratch offers you the chance to customize a home to fulfill your wish list and suit your lifestyle, it can also present financial challenges.
Timing Is Everything
The biggest factor to consider before you start looking to build? Timing.
Each part of the building process takes time. If you delay securing financing, for example, you could inadvertently delay the completion of your dream house.
Is there a best time to arrange financing?
The sooner you can secure the money to finance each part of the design and build process, the better. The financing and planning stages can take a few months. The moment you decide to take the leap into custom home ownership, best start thinking about how you’re going to pay for it.
What types of financing do you need and when do you need them? We’ve outlined them here in 7 steps.
The 7-Steps to Financing Your Dream Home
The cost of constructing a custom home is generally thought of as one lump sum. For instance, a custom home build will cost X and so X is what is needed.
The reality is more complicated than that. There are several stages to the home building process each with its own considerations, both financial and logistical. We’ve simplified the process into 7 main steps:
- Secure a land loan
- Buy land
- Hire a custom home builder
- Design your home
- Secure a construction mortgage/loan
- Build your custom house
- Secure a conventional mortgage
Our guide outlines each of these steps and gives you an estimated time they take to complete. They don’t necessarily need to be followed in this order, and we’ll discuss why in a moment, but for the most part, this is the general flow of the process.
Follow the steps to help you finance the build of your dream home seamlessly and effortlessly.
1. Secure a land loan
Timeframe: Less than one month
Before you can build a house you need a place to build it. Enter the land, or lot, loan.
- Land loan down payments can be as high as 50%. This is true when purchasing raw land, that is, land that doesn’t have built-in services (water, sewer, electrical).
- The good news: in Alberta, raw land can require a much lower down payment of closer to 30%.
- Land loans come with a higher interest rate than a conventional loan or mortgage.
- Prime + 2-7% for unserviced raw lots
- Prime + 1-4% for serviced city residential lots
- Vacant serviced city lots zoned for residential use normally require a slightly more modest downpayment of 20-40%.
Which should come first, the land loan or the design stage?
Remember earlier when we mentioned the 7 steps needn’t be followed in order? This is one of those times.
The required down payment for a vacant city lot can depend on whether or not you already have design plans in-hand.
- If you have a builder contract, permits, and plans in place, down payments tend to be on the lower end (20-25%)
- If you don’t have the above, expect your down payment to be higher (upwards of 40%)
We’ll talk more about this detail in Step 3 of the custom home financing process.
Which is easier to finance: urban or rural land?
As we mentioned in the previous section, the required down payment to purchase a lot depends more on whether it is serviced or not, not necessarily the location. Rural property can be more affordable initially. While it may be tempting to purchase rural vacant land because it’s less expensive, it’s important to remember the cost of building on it can negate the initial savings.
- Construction access,
- Lot clearing,
- Lack of infrastructure, utilities and other municipal services, and
- All-season accessibility …
…may very well turn your perfect rural retreat spot into a non-starter.
Can you use a HELOC as a land loan?
A second option to finance the purchase of land is a Home Equity Line of Credit (HELOC). A HELOC, or home equity loan, allows a homeowner to use the equity in their current home to purchase land. The perk is often a lower interest rate than a standard land loan.
The drawback to this option is that you need to:
- Own property, and
- Have equity in it.
Buy land directly from a seller
For those who want to skip the banks, there’s the option to buy land directly from a seller.
We call this a lease-to-buy option. You pay the seller on a regular basis, normally monthly, and, once the loan is paid off, the seller transfers the land title to you.
If you go this last route, lawyer fees are normally much higher.
2. Buy land
Timeframe: Variable, but often no longer than a few months
You’ve got your land financing—huzzah! Time to buy land. We recommend you work with a real estate broker or agent to locate and purchase a lot. It can save you time, energy, and money. As far as the cost of land goes, it’s impossible to estimate. The price is based on many, many factors including:
- Where are you looking to buy?
- What’s on the land?
- Are there services on the property (power, hydro, gas, sewer)?
- What’s its location relative to its proximity to towns or cities?
- How many acres are you looking to buy, or how large is the lot?
- How soon will it be developed?
- Is it currently being used for livestock foraging? Are there cows? (Honestly, this is a legitimate question when you live in Alberta!)
To buy land or not to buy land: which is better?
Whether or not you decide to purchase land right away or not is up to you. Either way, we encourage you to educate yourself on all the characteristics of the lot you’re looking to buy so there are no financial surprises later.
Which begs the question: is it even necessary to secure a land loan and to buy land before approaching a custom home builder? Not necessarily. We explain why next.
3. Hire a custom home builder
Timeframe: Variable, depending on how many builders you interview
Another step that could move around on our list is the hiring of a custom home builder. Why? The reasons are two-fold:
- When you approach a builder having already purchased land, they can more accurately estimate the final home construction price. Some builders won’t even work with you until you have a good idea of where you want to build. For this reason, the hiring of a home contractor fits nicely in step #3. Having said that,
- Many banks want to see design plans before they extend credit to buy land. For this reason, you could say this step should come first on our list.
What’s a potential custom homeowner to do? Answer: Vet several builders and then choose the one you’d eventually like to work with.
How much does it cost to meet with potential custom home builders?
An initial consultation with a builder should cost you nothing. A reputable, experienced custom home builder will gladly meet with you for free and regardless of where you’re at in the building life cycle. Use the first discovery meeting as an opportunity to ask the contractor questions and to see if you’d like to work together. Like any good relationship, it’s important to pick a contractor that you trust.
As experts, they’ll walk you through every consideration from where you are with your vision for a home to what you need to do to make it a reality.
What does a custom home builder do?
The team that builds your dream home will do more than swing hammers and grout tile, they’ll:
- Design your home
- Act as a general contractor by coordinating subcontractors
- Handle the ordering of materials and supplies
- Manage construction costs
- Obtain building permits and approvals
- Help you acquire land, finance it temporarily, and even, in some cases, have an inventory of plots available for you to purchase
In the case of a lender who wants to see architectural designs before extending credit, a custom home builder can help there, too. Many have spec designs you can use in the interim to satisfy financing requirements and speed up the approval process.
Speaking of architectural designs, that’s step 4 on our list: Design your home.
4. Design your custom home
Timeframe: One to two months
Considered by many to be the step they look forward to the most, the design phase is where the creative juices flow.
The design of your dream property takes the help of an architect. Depending on the scope of your project and the builder you choose, you may need to find an architect yourself or the builder will have one they prefer to work with.
Your custom home builder will guide you through the design process. It’ll involve a discussion about:
- The desired square footage of your home
- Your idea for a floor plan, number of stories, number of rooms, room type, etc.
- How many bedrooms would you like it to have? Bathrooms?
- A discussion about your list of priorities, must-haves, like-to-haves, and non-negotiables
- Outdoor living spaces, like decks, sunrooms, patios?
- What about the size of the garage?
- Would you like a finished basement, walk-out basement, and/or live-in suite?
- What about landscaping? Will this be part of the plan?
- Your budget and how to stick with it while also realizing your vision
- Timelines and scheduling for permitting, approvals, inspections, and deposits
Now that we’ve covered the what of the design phase, let’s discuss the when.
When is the best time to design a custom home?
For obvious reasons, many Canadian home builders like to time the planning and approval stages of a custom home to take place over the winter. Cold weather can delay construction or, if you’re at the ground-breaking phase, make it impossible. Keep this in mind when planning your build: winter is for planning, spring is for building.
How much does the design phase cost?
Cost: Varies depending on project scope.
A good rule of thumb for the cost of the consultation and design phase is 5% of final custom home price. For example, if the total cost of your custom build is $750,000, the design phase would be ~$40,000. Most often, this investment is built into the total price of your project.
5. Secure a construction mortgage or loan
Timeframe: Less than one month
A construction mortgage provides the financing to build a custom home. It can do more than that, though. A construction loan can provide the funding to build the home andthe money to purchase the land. But wait—earlier in Step #1 we talked about the need to secure a land loan. Are we contradicting ourselves now by saying a construction mortgage makes a land loan unnecessary?
The answer: it depends.
Which type of financing should you choose: a land or construction loan?
Whether you choose a land or construction loan depends on timing and where you are in the contracting process. A construction mortgage allows a buyer to borrow money for approximately one year, enough time to build most custom homes. This type of loan is also paid out in installments (normally three or four). As the contractor completes certain phases of the build, they’re paid another lump sum. Land loans, on the other hand, are paid to you all at once.
Construction Mortgage Pay Schedule
|Payment #||Phase||% of Total|
|1st (if you need to buy land)||Purchase Vacant Land||65-75% of land cost|
|1st (if you already own land)||Excavation & Foundation||15%|
|3rd||Plumbing, Electrical, Drywall||65%|
Ask yourself which category you fall into:
- If you’ve already bought a piece of land, or if you’ve found one you’d like to purchase, but don’t anticipate moving forward with construction right away, a land loan is for you.
- If you anticipate committing to the construction of your dream home within a year, then it makes more sense to go the construction loan route.
What are the different types of construction loans?
There are two main types of construction mortgage:
- A loan that you pay back once your property is complete and you’ve taken possession
- A loan that the lender converts to a conventional mortgage once your new home is complete and has been re-assessed
Option 2 is the more popular, and often more affordable, choice for the average home buyer. They come with lower interest rates and don’t require you to pay another set of closing costs.
6. Build your custom home
Timeframe: Up to 10 months
Assuming you have the money, the land, the builder, and the design plans to move forward to this stage, it can take upwards of ten months to build a custom home in Canada. Keep in mind these ten months are on top of the time it takes to secure financing. A property build is best begun in the spring in order to take advantage of as much as the good weather as possible.
How much does it cost to build a custom home in Canada?
The average cost to build a custom home in Alberta can run anywhere from $405-860 per square foot. The range takes into account material costs and finishes.
If, for example, you’re looking to custom build a 2,000 square foot home, expect to pay between $810,000 to $1.72 million for the final product.
7. Mortgage loan
You’ve done it!—you envisioned your dream home and took the steps to create it.
Now that the subcontractors are gone, the landscaping is done, and your new home has been re-assessed, you can look to finance whatever is owning on the property.
If you opted for a construction mortgage in Step 5, you can either:
- pay it back in full now (depending on the original terms of the loan), or
- convert it to a residential mortgage.
The Secret To A Successful Custom Home Build
Once you’ve outlined the financial steps you need to take before embarking on a custom home build, the next step is to find a well-respected home builder.
Here’s where HR2 Construction comes in. With an in-depth knowledge of every aspect of custom home building including general contracting, architectural design, and permitting, our team will make the process fun and easy from beginning to end.
Our experience coupled with a focus on building strong client relationships have earned us the reputation of being one of the best builders in the industry.
Bring your vision to life. If you’re considering a custom home build, contact us. We’ll start with a complimentary estimate and a chance for you to meet our team.
We look forward to exceeding your expectations with a custom home you’ll have for life.