Construction Mortgage Draws

A construction commitment may establish the maximum facility, but the borrower normally earns access to that facility through progress. A draw is the amount released after the lender is satisfied that specified work, equity contribution, documentation and legal conditions have been met.

Loan approved, loan committed, amount advanced, and amount available for the next draw are four different numbers.

Common residential milestones include foundation, framing/roof, mechanical and drywall, substantial interior completion, and final completion. Commercial projects may use monthly cost-consultant reports rather than a small number of named stages.

No Canadian rule requires every lender to use four draws or the same percentage at each stage. CMHC’s insured progress-advance service can validate up to four consecutive advances under its Full Service option, but that is an insurer-program feature rather than a universal draw schedule.

A simplified borrower model is: Potential next draw = lender-recognized cumulative advance capacity − prior advances − required retentions/deductions, subject to all legal and project conditions.

The lender-recognized capacity may be constrained by verified progress, approved budget, LTC, LTV, cost-to-complete, the commitment amount, borrower-equity requirements or several of those at once. A $100,000 contractor invoice does not itself prove that $100,000 is currently drawable.

An inspector or cost consultant can verify work completed and sometimes percentage completion. The lender may also need invoices, contracts, change orders and an updated budget to understand remaining cost.

A project can pass the physical inspection and still fail the financial draw test if the remaining undisbursed money is no longer enough to complete the approved scope.

Lenders may require borrower funds or land equity to be invested before or alongside advances. Proof can include land ownership/equity, paid invoices, bank statements, deposits and other evidence accepted by the lender.

The timing rule is lender-specific. Borrowers should know exactly which expenses count as equity, when they count, and whether cost overruns must be funded entirely by the borrower before further advances.

Construction financing often reimburses progress after inspection rather than funding every trade before work begins. The sequence can be: borrower/contractor pays or accrues costs → work reaches milestone → inspection/report → legal/title checks → lender approval → funds released.

If the time between contractor payment and lender funding is longer than expected, the project can become cash-starved even though the total committed facility is adequate.

Many construction facilities charge interest on the outstanding advanced balance rather than the entire approved commitment. Some structures also include standby, undrawn, administration or extension fees; private loans may use prepaid or reserved interest.

The draw curve therefore changes financing cost. Earlier advances and longer construction generally produce more interest than a later, faster draw pattern.

A practical test is remaining verified cost ≤ undisbursed committed facility + committed borrower funds still available. The exact lender calculation can be more conservative and may exclude disputed savings or uncommitted future capital.

If the inequality reverses, the problem is not solved by a higher percentage-complete report. Additional equity, scope reduction, revised contracts or new financing may be required before further funds are safe to release.

Upgrades, design revisions, unforeseen structural work and municipal requirements can alter hard cost, schedule, contingency and final value. The lender may require approval before recognizing the change in the funded budget.

An upgrade that increases final value by $40,000 but costs $70,000 still consumes $30,000 of economic project capacity before considering delay and financing cost.

A lender can retain money contractually because work is incomplete, deficiencies remain, cost-to-complete is tight, or the commitment requires a final reserve. Separately, Ontario’s Construction Act creates statutory holdback obligations in the construction-payment chain.

Borrowers should not assume that one retention automatically satisfies the other. The lawyer, lender and construction-payment process may each track different amounts for different purposes.

Ontario construction lien rights can affect mortgage priority and disbursement risk. Depending on the project and lender, counsel may require title searches, statutory declarations, proof of payment, holdback information or other clearance before an advance.

The legal process is not merely a delay imposed after the inspection. It is part of protecting the lender and owner from paying new money into a title/payment structure with unresolved claims.

Final funding may require completion evidence, occupancy or municipal sign-off where applicable, deficiency resolution, final appraisal/inspection, title and lien clearance, insurance conversion, and confirmation that the permanent mortgage can fund.

The last 5% of physical work can therefore represent a much larger share of financing risk if it is the portion that unlocks occupancy, sale, or permanent takeout.

Assume a $700,000 construction facility has $400,000 already advanced, leaving $300,000 undisbursed. Updated remaining cost is $335,000 and the borrower has only $15,000 of committed cash left. Total identified completion capital is $315,000—$20,000 short of the current cost to complete.

Even if the property value currently supports another advance, releasing all remaining facility money would not cure the completion deficit. The budget has to be repaired first.