Thenuance of financing custom construction requires expert finesse
When Laura Miller and her husband decided to tear down their home and rebuild, they knew financing would require additional expertise.
“We understood it was going to be a unique project from the get-go due to the complexities involved, including discharging a mortgage with our current lender. We needed to work with somebody who was used to handling construction financing,” she says.
Working with a mortgage broker proved invaluable in getting through the multiple stages of the projects. “Without a doubt working with their team gave us access to lenders we would not have been able to ourselves. It was all very seamless.”
Not all negotiations are created equal, particularly when dealing with custom construction projects, says Drew Donaldson, principal, Donaldson Capital in Toronto. He worked with the Millers on their rebuilding project.
“Custom construction financing can be incredibly complex, and the best terms are not always found
with the private banker a person has been with for 10 years. With the right resources, investors can increase their leverage, access better interest rates, reduce taxes, or find an alternative financing structure that works to their advantage.”
Construction financing has many moving parts because there are so many different forms of capital to consider, he adds. “Often, a mortgage underwriter at a bank may not have a complete picture of the file or its complexity. A mortgage broker on the other hand has access to multiple lending sources and senior level executives within the banking systems.”
Donaldson also assigns a team to each project, rather than a single underwriter, in order to handle the many nuances of construction financing. “We have people who understand construction budgets, drawings, and everything else that goes into a custom build project, along with in- depth knowledge of prime markets within the GTA and Muskoka.”
The challenging aspect in many large- scale projects is ensuring flexible cash flow throughout the construction and subsequent financing stages, he says. “For example, a private banker may only offer a $ 2 million mortgage for a self- employed business owner, forcing them to pull money out of their corporation and pay added tax on the down payment. In working with banking partners, we could negotiate for $4 million and reduce their taxes by as much as $500,000.”
Cottage and home expansion construction projects have been booming as more people are working from home or relocating outside of the city. “One silver lining is that interest rates have dropped below two per cent for fixed and
variable rates. This is creating prime opportunities for mortgage refinancing,” he says.
Now settled into their custom- designed home, the Millers say with certainty that choosing a mortgage broker proved to be a wise decision. “We really valued working with someone who knows the space better than us,” Laura says.