How Does a Construction Mortgage Actually Work? Draws, Cash Gaps and Why Builds Stall

By Rahul Kumar, Real Estate Broker & Licensed Custom Home Builder · Golden Brick Homes · August 2026 · 11-minute read

More custom builds stall over financing logistics than over anything that happens on site. Not because the money was never approved — because the owner assumed the bank would hand it over the way a normal mortgage does. It does not. Understanding that one difference before you break ground is worth more than any other piece of planning you will do.

Here is the sentence that explains almost everything about construction financing: the bank pays for work that is already finished. Not work you are about to start. Not materials sitting on a truck. Work that a third party has physically inspected and confirmed is standing on your lot.

Everything difficult about a construction mortgage follows from that one rule.

How a construction mortgage differs from the mortgage you already know

On a resale purchase, your lender wires the full amount to your lawyer on closing day. One advance, one moment, done. You own a finished house and the lender holds security against a finished house.

On a build, there is no finished house to secure. At the start there is a lot, some drawings and a contract. So the lender releases the money in stages — draws — and each stage only funds once the value it is lending against physically exists.

Three consequences follow immediately, and they are the ones that catch people:

• You pay interest only on what has been drawn, not on the full approved amount. That part is in your favour.
• The money goes to your lawyer, not to you. Your lawyer sub-searches title for construction liens, applies the statutory holdback, and only then releases funds.
• You are always paying for work before the bank reimburses you for it. This is the part that ends builds.

What a draw schedule actually looks like

Most residential construction mortgages in Ontario run on three to five draws, with four being the common structure on a custom build. The exact stages vary by lender, and yours will be written into your commitment letter — read it before you sign, not when you need the first draw.

Notice what is missing from that table: a draw at the beginning. There is no advance for mobilisation, deposits on windows, or the first trade invoices. On most schedules the first draw does not arrive until the foundation is in the ground and backfilled.

Why the bank funds after the stage, not before

It looks like distrust. It is actually security law.

A lender’s protection is the property. On a completed home, the security is worth roughly what was lent. On a half-built home, it is not — a foundation and a framed shell are worth far less than the money spent to create them, because a lender who has to take the property back has to pay someone else to finish it.

So the lender advances only against value that already exists on the ground. If it funded ahead of the work and the build stopped, it would be holding security worth less than its loan. Every awkward feature of construction financing — the inspections, the holdback, the lawyer — exists to keep the loan behind the value rather than ahead of it.

Which is why a draw is not a payment request. It is a valuation event. An appraiser attends, confirms the stage is genuinely complete, and reports what the property is now worth. If the appraiser disagrees with your builder about whether lock-up has been reached, the appraiser wins.

The cash gap nobody budgets for

This is the section I would print and put on the fridge.

Between doing the work and receiving the money for it, several things have to happen in sequence. Each one takes time, and none of them can be rushed by wanting them faster.

The 10% statutory holdback

Ontario’s Construction Act requires anyone paying for an improvement to land to hold back 10% of every payment. This is the basic holdback under section 22 of the Act, and it is not optional or negotiable — your lawyer will apply it whether or not anyone discussed it with you.

So a $200,000 draw does not put $200,000 in your builder’s account. It puts $180,000 there. The remaining $20,000 sits until the lien period has run. Across a full build, the holdback ties up a meaningful sum for months.

Lien claimants have 60 days to preserve a lien, and holdback is typically released once that period has expired — commonly 45 days after the Certificate of Substantial Performance is published. As of January 1, 2026, longer projects also see accrued holdback released on an annual cycle rather than only at the end, with specific notice steps required.

Inspection and legal timing

After your builder says a stage is done, the sequence runs: request the draw, lender orders the appraisal, appraiser attends, report is written and delivered, lender reviews and instructs the lawyer, lawyer sub-searches title for liens, lawyer applies the holdback, funds release. Every one of those steps is a real business day or several.

What that means in practice

Your trades invoice on their schedule. Framers want paying when the framing is done, not when an appraiser gets around to confirming it. Your window supplier wants a deposit months before lock-up. Your lender reimburses on the lender’s schedule.

The distance between those two schedules has to be covered by somebody, in real money. Either you carry it, or your builder carries it. If neither of you planned to, the build stops — not because anything went wrong on site, but because an invoice arrived before a draw did.

This is the single most common reason a first build stalls. It is entirely predictable and almost never budgeted for.

Why your regular mortgage broker often can’t do this

People are frequently surprised when the broker who handled their last two purchases says no, or quietly stops returning calls. It is rarely incompetence.

• It is a different product with a different lender list. Construction lending is specialised. Many bank branches have no appetite or internal expertise for it, particularly on custom builds, self-employed borrowers or unusual land. The lenders who do it well are a short list, and a broker who has never placed one does not have relationships on it.
• The file is heavier for the same commission. A construction file involves drawings, a fixed-price contract, a builder’s credentials, a cost breakdown, an as-complete appraisal, a draw schedule and months of administration after funding. A resale purchase involves none of that.
• The administration continues after closing. On a resale deal the broker’s work ends at closing. On a build it continues through every draw for a year or more.
• Alternative lenders are often part of the answer. B-lenders and mortgage investment corporations actively fund Ontario construction and are more flexible on income documentation and property type — usually at a higher rate. A broker without that channel simply cannot solve some files.

The practical lesson: find a broker who places construction mortgages regularly, and find them before you buy the lot, not after your drawings are done.

What lenders actually want to see

The file that gets approved quickly tends to contain the same things:

• A fixed-price contract with a licensed builder, not an estimate. Cost-plus arrangements are harder to finance because the lender cannot see the ceiling. Which structure actually protects you is a separate question — see fixed price or cost-plus, and which one protects you.
• A builder with credentials that survive checking. In Ontario a builder constructing on land you own must be HCRA-licensed and must enrol the home with Tarion before construction commences. Lenders verify this.
• A complete cost breakdown that includes the site work, not just the house. Lenders have seen enough budgets that omitted servicing, trees and grading to look for them specifically.
• An as-complete appraisal supporting the finished value.
• Evidence you can carry the gap — liquid funds, or a line of credit that is already in place rather than one you intend to arrange later.

How this connects to the rest of your budget

Two other numbers move with your financing, and both are usually discovered late.

Your real all-in cost. Lenders lend against the whole project, not the construction contract. On an established Oakville lot, site work, soft costs and statutory charges add far more than most owners expect — the worked example in our breakdown of what it actually costs to build a custom home in Oakville shows a contract quoted at $300–$400 per square foot landing at $448–$658 all-in. If your financing was sized against the contract figure, you are short before you start.

HST. The construction contract attracts 13% HST, and that is real cash that has to be funded during the build even if a rebate arrives later. Most Oakville custom builds sit above the rebate thresholds anyway — see who actually qualifies for the HST rebate on a new custom home before you count it as part of your financing plan.

And before either of those: know what your land is worth and what it will carry. Start with the guide to building lots in Oakville.

How not to be the build that stalls

1. Line up construction financing before you buy the lot. Not before you break ground — before you commit to the land. What a lender will advance shapes what you can afford to build on it.
2. Read the draw schedule in your commitment letter. Know exactly what triggers each draw and what has to be inspected. Give a copy to your builder so both of you are working from the same document.
3. Hold a real cash reserve outside the mortgage. Not equity in the lot. Cash or an already-approved line of credit you can reach in a week.
4. Ask your builder directly how they fund the gap. A builder who can carry work between draws is a materially different proposition from one who needs each draw before starting the next stage. Ask the question before you sign, and treat a vague answer as an answer.
5. Budget the holdback as if it were a cost. It comes back, but not when you need it.

Frequently asked questions

How does a construction mortgage work?

A construction mortgage releases money in stages called draws rather than as a single advance. Each draw funds work that is already complete and has been verified by a third-party inspection or appraisal. Funds go to your lawyer, who searches title for construction liens and applies the statutory holdback before releasing money. You pay interest only on the amount drawn, and the loan converts to a conventional mortgage at completion.

How many draws are in an Ontario construction mortgage?

Most residential construction mortgages run on three to five draws, with four being the common structure on a custom build: foundation, lock-up, drywall and completion. The exact schedule is set by your lender and written into your commitment letter.

Why does the bank pay after each stage instead of before?

Because the lender’s security is the property itself. A partly built house is worth less than the money spent creating it, so advancing funds ahead of the work would leave the loan larger than the security behind it. Funding after each verified stage keeps the loan behind the value on the ground.

What is the 10% holdback on a construction draw?

Ontario’s Construction Act requires anyone paying for an improvement to land to hold back 10% of every payment, known as the basic holdback under section 22. It protects against construction liens and is released once the lien period has expired, commonly 45 days after the Certificate of Substantial Performance is published. Lien claimants have 60 days to preserve a lien.

Why do I need cash on hand if I have a construction mortgage?

Because your trades invoice on their schedule and your lender reimburses on the lender’s schedule. You pay for each stage before the draw covering it arrives, and the 10% holdback means each draw is smaller than the work it pays for. That gap has to be covered in real money by you or your builder, and it is the single most common reason a first build stalls.

Why won’t my mortgage broker do a construction mortgage?

Construction lending is a specialised product with a short lender list, and many bank branches have no internal appetite or expertise for it. The file is heavier than a resale purchase, the administration continues through every draw for a year or more, and part of the answer often lies with B-lenders or mortgage investment corporations that not every broker can access.

When should I arrange construction financing?

Before you buy the lot. What a lender will advance shapes what you can afford to build, and discovering your financing ceiling after you own the land removes your best options.

Do I pay interest on the whole construction mortgage during the build?

No. During construction you pay interest only on the funds actually advanced, so your carrying cost rises as draws are released. The loan converts to a regular amortising mortgage at substantial completion.

This article explains how construction lending works mechanically. It is not mortgage advice, and I am not a licensed mortgage broker — I am a licensed real estate broker and an HCRA-licensed custom home builder. Lender terms, draw schedules, rates and qualification rules vary by lender and change often. Confirm your position with a licensed mortgage broker or lender, and confirm lien and holdback obligations with your real estate lawyer, before making decisions.

Sources: Ontario Construction Act (basic holdback under section 22; 60-day lien preservation period; amendments in force January 1, 2026); Tarion and HCRA licensing and enrolment requirements for contract homes; published 2026 Ontario lender and mortgage brokerage guidance on construction draw mortgages.

Rahul Kumar — Broker, Royal LePage Certified Realty, and principal of Golden Brick Homes, an HCRA-licensed and Tarion-backed builder in Oakville.