New-build loans: dead horse or business opportunity?

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One sector of the mortgage industry seems to be dying: fewer and fewer lenders are financing self-build mortgages, according to one broker.

“Mortgage options for new construction builds are pretty limited, especially when it comes to self-build homes; I don’t have any options for clients who want to construct their own homes,” Jonah Wright, a mortgage consultant with Mortgage Intelligence, told MortgageBrokerNews.ca. “Any time I get a new construction deal where a client wants to do a self-build, I have to mould it into a contract build.”

Generally speaking, there are three types of new construction mortgage options; self-build, where the owner/client acts as contractor as well; contractor build, where the client works with a contractor; and builder purchases.

Wright says clients are frustrated when they put the work into preparing for a self-build mortgage but are forced to take out a contractor build mortgage.
He even had one case where a contractor – who actually builds homes for a living – was forced into a contractor build mortgage.

“It’s frustrating for clients because that’s not what they originally had in mind; the clients do all the cost analysis themselves, but lenders are requiring a third-party contractor attached,” Wright said. “So they have to hire a contractor and sometimes pay for a new home warranty.”

According to Wright, the only option for clients set on self-build mortgages is to go through one of the banks.

“I have to send clients to the banks if they don’t want to do (a contractor build mortgage).”

For his part, Steve Bucher, a broker with Mortgage Intelligence, says construction mortgages are a dying breed and that any broker who still does them should be commended.

“Construction mortgages are a nightmare; they’re written in such a way for them to fail, essentially,” Bucher said. Conflict between lenders and clients is common, he says, because lenders release funds in stages and the money provided is often not enough to cover the costs of certain building stages.

“A lot of brokers won’t even do them anymore,” Bucher continued. “I don’t think I have access to any lenders that will do them, but there are a few credit unions I can send clients to.”
  • len lane on 2015-10-30 11:04:34 AM

    There is no question that they require a special skill set. Having 15 yrs in the building industry before mortgages does help. The trick is...to send them to us :) We'll gladly take them off your hands.

  • Andy MacDonald on 2015-10-30 11:57:39 AM

    Like everything in our business, you just need to be dealing with the right lenders and make sure you manage your clients expectations.

  • John Meredith CITYCAN on 2015-10-30 12:36:17 PM

    The problem with builder loans is lack of knowledge by agents.Twenty five percent or more cash equity needed and quality contractors or builders. Higher rates and fees required . Building single large homes on spec is not reccomended. Have done 8 million this month on this type of deals with more pending.

  • P.r. on 2015-10-31 4:03:42 PM

    Joke: a man walks into a bar. Now why would you build a house not knowing how to do it; anyone can paint : but can anyone finish drywall ? Contractors simply hire out - and take a huge premium, for what? Pay for ticketed trades is a must; electrical pipe fitting - AND drywall finishing - paying for an opinion is not. Put your money in the right place and if your mortgage advisor is limited in their scope (construction sense. Either they have 10+ years in construction or they are just SPECULATING) then make the appropriate choice. This is not a 'rate' war this is an open market - Canada, Alberta.

  • P.r. on 2015-10-31 4:04:55 PM

    A man walks into a bar. Blame the bar.

  • Jacqueline Hilchuk on 2015-10-30 1:03:00 PM

    The construction loan is the riskiest loan to borrow or lend. It's specialized lending. And I believe a background in construction is essential.

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