Construction Loans in Ontario — What Most Investors Get Wrong

Construction financing is where most new investors in Brand New BRRRR get surprised — and not in a good way.

Not because they couldn't find a construction lender. Construction financing is widely available in Ontario. The problem is that by the time they understand the true cost of the financing they accepted, they are already six months into a project with no easy exit.

What a Construction Loan Actually Is

A construction loan is short-term financing that covers the cost of building a property from the ground up. Unlike a conventional mortgage — which is secured against a finished building with a known market value — a construction loan is secured against a project that does not yet exist.

This is why construction loans are priced differently than conventional mortgages. The lender is taking on additional risk. Once construction is complete and the building is occupied and rented, the construction loan is repaid from the refinance mortgage. The construction loan is not long-term financing. It is a bridge from empty lot to completed asset — and the price of that bridge varies enormously depending on where you get it.

The Three Sources of Construction Financing in Ontario

Institutional lenders (major banks): Lowest rates — typically prime plus 1 to 2%. But requirements are demanding: detailed plans and permits in place before funding, established builder with track record, strong personal income verification. Many individual investors cannot meet their requirements, and the process is slow.

Alternative lenders (credit unions and B-lenders): More flexible requirements. Rates typically run prime plus 3 to 5%. Monthly interest payments during construction are standard. Qualification requirements are more accessible.

Private lenders: Most common for individual investors building multifamily in Ontario. Speed, flexibility, fewer documentation requirements. The cost: rates typically run 8 to 14% annually on the outstanding balance, plus a lender fee at closing of 2 to 4% of the loan amount.

The Real Cost of Market-Rate Private Construction Financing

Here is where most investors get surprised — not on the rate itself, but on what the rate produces when applied monthly to a large balance over many months.

That $73,000 to $85,000 was not in the initial plan. It comes out of the deal's returns.

Key Terms That Matter More Than the Rate

Draw schedule: Construction loans do not advance all funds at once. They release money in stages — typically 4 to 6 draws — tied to verified construction milestones (foundation, framing, rough mechanicals, drywall, final). Each draw requires an inspection before funds are released. The schedule determines when you can pay your builder. A slow draw process from the lender creates delays on site.

Holdback requirements: Ontario's Construction Act requires a mandatory 10% holdback on all contractor payments — meaning you are legally required to retain 10% of each payment until the lien period expires after project completion. In plain terms: if your builder invoices $100,000, you release $90,000 and hold $10,000 until the project closes out. Some lenders impose additional holdbacks on top of the statutory requirement.

Monthly vs. deferred interest: Some lenders require monthly interest payments during construction — cash out of your pocket every month. Others allow interest to accrue and be paid at the end. The second structure is significantly better for cash flow during the build.

Fee timing: Is the lender fee due at commitment, at first advance, or at completion? When you pay the fee affects your cash flow during the project.

Prepayment penalties: When you refinance out of the construction loan at completion, you want to do it as quickly as possible. Some lenders penalize early repayment. Avoid them.

How Our Construction Financing Works Differently

Through years of relationship-building and consistent deal volume, the construction financing we use for Windsor-Essex projects operates on a fundamentally different structure:

One flat fee — approximately 4% of the construction loan amount — due only after occupancy. Nothing during construction.

On a typical Windsor-Essex triplex with a $683,000 construction loan, that is approximately $27,000, paid after the keys are in hand. If the build runs a month or two longer than planned, the fee does not increase. The builder focuses on building it right, not rushing to reduce the investor's interest costs.

These terms are not available to someone approaching this lender independently. They exist because of a relationship built through consistent, reliable volume delivery over years — with a builder the lender knows and trusts.

Questions to Ask Any Construction Lender

• What is the total lender fee, and when exactly is it due?
• Are interest payments required monthly during construction, or is interest deferred to the end?
• What happens if construction runs 1 month over? 2 months?
• What is the prepayment structure when I refinance out?
• How many draws are there, and what is your typical draw turnaround time?
• Do I need to arrange my refinance mortgage with you, or am I free to refinance with any lender?

This article is for general information only and does not constitute financial or legal advice. Always consult qualified professionals before making financing decisions.

Aditya Kumar Soma is a real estate investor with 50+ rental units and a $20M+ portfolio in Windsor-Essex, Ontario. He has financed and completed 20+ new construction projects and negotiated construction financing terms through long-term lender relationships built since 2019.