Financing a build comes with its own vocabulary. Here's the plain-English version of the terms you'll hear when you build a home, duplex, laneway or multiplex — so nothing in your term sheet is a surprise.
By Peter Leung, Mortgage Broker #503918
Construction (draw) mortgage — A mortgage advanced in stages as the build progresses, instead of all at once.
Draw — A scheduled release of funds at a construction milestone, paid out after the work is verified.
Draw schedule — The agreed stages at which money is released — commonly foundation, lock-up, drywall/finishing, and completion.
Lock-up — The point where the structure is weather-tight: walls, roof, exterior doors and windows in and lockable.
Interest-only (during construction) — You pay interest only on the funds drawn so far, not on the full approved amount.
Progress (draw) inspection — A site check, often by an appraiser or quantity surveyor, confirming a stage is complete before funds release.
Completion / occupancy permit — The municipality's sign-off that the home is built to code and legal to live in.
Takeout (permanent) mortgage — The normal mortgage that replaces the construction loan once the build is finished.
Hard costs — The physical build: labour and materials.
Soft costs — Everything that isn't physical construction — design, permits, fees, legal, insurance and interest.
Contingency — A reserve (often 10–15%) for overruns and surprises.
Cost to complete — The money still needed to finish; the lender checks at each draw that it stays within budget.
Interest reserve — Money set aside, or built into the loan, to cover interest during the build before there's rent or sale proceeds.
Loan-to-cost (LTC) — The loan as a percentage of total project cost; lenders cap it (e.g. 75%).
As-complete value (ARV) — The appraised value of the finished property.
Loan-to-value (LTV) — The loan as a percentage of the as-complete value. Lenders advance the lesser of LTC and LTV.
Holdback — Funds retained on each draw — in BC the Builders Lien Act generally requires 10% — to protect against unpaid trades.
Builders lien — A legal claim a contractor or supplier can register against title for unpaid work; the holdback guards against it.
Fixed-price contract — A building contract with a set total price; lenders prefer it to open-ended cost-plus.
Builder's risk / course-of-construction insurance — Coverage for the project while it's being built.
New home warranty (2-5-10) — BC requires third-party warranty on new homes built by Licensed Residential Builders.
GST & new housing rebate — 5% GST applies to new construction; rebates may reduce it for qualifying buyers.
Pro forma — A projected budget and income statement for the finished project: rents, expenses and profit.
Net operating income (NOI) — Rental income minus operating expenses, before mortgage payments.
Debt-service coverage (DSCR) — NOI divided by debt payments; multi-unit and commercial lenders want comfortably above 1.0.
Cap rate — NOI divided by property value; a quick yield measure for income property.
CMHC MLI Select — CMHC's insured financing for 5+ unit rental, with better terms for hitting affordability, energy-efficiency or accessibility targets.
Spec build — Building on speculation to sell, rather than a pre-sold or owner-occupied build.
SSMUH — Small-Scale Multi-Unit Housing: BC rules requiring most municipalities to allow 3–4 units (up to 6 near frequent transit) on many former single-family lots.
Floor space ratio (FSR) — The ratio of buildable floor area to lot size; it governs how much you can build.
Setback — The required distance between a building and the property lines.
Want this applied to your actual project? See the construction & development financing page and its draw-mortgage calculator, then tell me what you're building.
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