Construction Financing: What You Need to Know to Build Your Timber Frame Home

Make Your Timber Frame Dream Home a Reality with the Right Construction Financing Option

Building a new home is an exciting endeavor. The opportunity to live in the home of your dreams and to be a part of creating that home from design through to finishes is a hugely rewarding experience. However, deciding how you will finance your project can often feel like an overwhelming (and less exciting) part of the process.

Our team of timber frame experts have got the design and execution side of your project figured out, but people often ask us questions about financing the construction of their timber frame project. There are three main ways our clients are choosing to finance their timber frame project:

1. Cash

If you have the funds available, this might be the route you take for financing your timber frame project. However, if you don’t have all cash readily available to pay for the project, there are two construction financing options you’ll want to consider:

2. Construction Loan

3. Home Equity Line of Credit (HELOC)

What is a Construction Loan?

One construction financing option is a construction loan, also known as a builder’s or draw mortgage. This is a short-term loan facility that is used to finance the construction of your new home. It is a bit more complicated and can be more costly than a HELOC, but it’s a great option if you don’t have equity to access from another property.

Different than a traditional mortgage, a builder’s mortgage is draw-based and allows you to access funds on a progress advance basis based on pre-determined stages of the construction process. A typical schedule of builder’s loan advances might look something like this:

Prior to each of the draw stages being completed, the construction loan lender will often send an inspector to confirm completion of the stage before the funds are released.

Once the project is complete, you have two options:

• pay off the loan or
• convert the construction loan to a traditional mortgage

During the building process, the construction loan is interest-only on the amount of the loan outstanding. However once completed, the loan payments (or the payments on the new traditional mortgage) are made up of both principal and interest.

Construction Loans and Land

You can use the first advance of the builder’s loan to help with the purchase of the land you plan to build on. If you already own the land on which you are planning to build, the first advance is available as equity takeout on the value of the property. If the property was financed, the construction loan will pay off any existing financing.

Other Construction Loan Considerations

• A builder’s loan is deemed higher risk than a traditional mortgage; as a result, down payments are higher – typically around 25-35% of the overall project cost.
• To secure a construction loan, credit scores need to be high and you need to provide assurance that you can make interest-only payments on your loan while still handling all other living expenses.
• To confirm the builder’s loan, the lender needs to be provided with all appropriate build documentation, including construction drawings, permits, and detailed construction cost estimates – all of which Normerica will provide, or work with you to complete.

What is a Home Equity Line of Credit (HELOC)?

Another construction financing option is a Home Equity Line of Credit (HELOC) which is more straight forward than a builder’s loan. As the name suggests, the HELOC allows homeowners to take advantage of built-up equity on an existing property to finance the construction of another. So, if you own your home and have worked hard over the years to build up equity in it, it’s about to pay off. A HELOC is a fantastic option if you want to build a recreational property!

There are no draws or stages of completion hurdles like with a construction loan. How, when, and why the money is used is up to you (including for the purchase of land). You pay interest on the funds you draw while building. Once the home is substantially complete (usually 97%), the debt outstanding on the HELOC can be converted into a traditional mortgage.

How Normerica Can Help You Plan for Your Construction Financing and Shorten the Financing Timeline

Although Normerica does not offer any in-house financing, there are a few ways that choosing Normerica will help you in financing your timber frame home construction.

1. Construction financing and your budget
2. Shortening of the construction timeline

Construction Financing and Your Project Budget

Whether Normerica is simply supplying a timber frame shell package, or fully involved in the construction of your timber frame home (through our construction management services), we will work with you to develop a practical budget for the complete construction of your home, from labour costs to finishes.

It is hugely helpful to tap into our team’s expert knowledge and get a good picture of the full cost of your project. Armed with these numbers, you will be in the best position to determine the right financing option. We’ve been doing this for over 45 years, so we have lots of experience in build costs!

To find out more about budgeting for your timber frame home, check out these posts:

• Costs Elements of a Timber Home
• The Real Cost of Building a Timber Frame Home
• How Much Does a Custom Home Cost? 7 Factors That Drive Prices

Your Timber Frame Construction Timeline and How It Impacts Your Construction Financing

Another factor when considering your construction financing options is the overall time the construction of your project will take. When using a construction loan or HELOC, the time it takes to complete the build will ultimately cost you money in interest.

There are few ways working with Normerica will ensure a smoother and ultimately quicker and less expensive build:

• Our unique building system of prefabricated wall panels cuts down on on-site construction time, making your build faster and, ultimately, less expensive.
• With every home we sell we include the time of a highly experienced Normerica Technical Representative who will work on-site with your builder during the critical stages of construction. This not only ensure your builder is supported by an expert in the Normerica product, but it has also shown to make the process faster and less prone to delays, which saves you money.

Financing Your Timber Frame Home Build: Common Questions

Q: What are the main ways to finance building a custom timber frame home?

There are three primary financing options for building a custom timber frame home: cash, a construction loan (also called a builder's mortgage or draw mortgage), and a Home Equity Line of Credit (HELOC). Cash is the simplest option if funds are available. A construction loan is a good fit when there is no existing property equity to draw on. A HELOC is well-suited to clients who own an existing property and have built up equity — particularly popular for financing a recreational property or cottage build.

Q: What is a construction loan and how does it work for a new home build?

A construction loan is a short-term loan facility used to finance the construction of a new home. Unlike a traditional mortgage, it is draw-based — funds are released in stages as construction reaches predetermined milestones. A typical draw schedule includes four stages: foundation completion (15%), building dried-in and weather-tight (25%), heating, plumbing, electrical and drywall underway (30%), and home substantially complete (30%). During construction, payments are interest-only on the outstanding balance. Once complete, the loan can be paid off or converted to a traditional mortgage.

Q: What down payment is required for a construction loan in Canada?

Construction loans are considered higher risk than traditional mortgages, so down payments are typically higher — generally around 25 to 35 percent of the overall project cost. Lenders also require strong credit scores and evidence that the borrower can manage interest-only payments during the build while covering other living expenses. Full build documentation is required to secure the loan, including construction drawings, permits, and detailed cost estimates.

Q: What is a HELOC and when is it a good option for financing a timber frame build?

A Home Equity Line of Credit (HELOC) allows homeowners to borrow against the equity built up in an existing property. Unlike a construction loan, there are no draw stages or completion hurdles — funds can be accessed as needed throughout the build, including for land purchase. Interest is paid only on the amount drawn. Once the home is substantially complete (typically at 97% completion), the outstanding HELOC balance can be converted to a traditional mortgage. A HELOC is a particularly strong option for clients building a recreational property or cottage who already own their primary residence.

Q: Can a construction loan be used to purchase land as well as build?

Yes. The first advance of a construction loan can be used to help with the purchase of the land on which you plan to build. If you already own the land, the first advance is available as equity takeout on the value of that property. If the land was previously financed, the construction loan will pay out any existing financing on it.

Q: How does working with Normerica help with construction financing?

Normerica helps in two key ways. First, the team works with clients to develop a comprehensive project budget covering all construction costs from labour through to finishes — giving clients the accurate numbers they need to approach lenders with confidence. Second, Normerica's prefabricated building system and on-site Technical Representative support a faster, more efficient construction process, which directly reduces the amount of interest accumulated during the build on a construction loan or HELOC.

Explore Your Construction Financing Options to Find the Right Way to Fulfill Your Timber Frame Home Dream

Normerica will assist you through the entire process of building your home – from creating a budget for you to explore your financing options and crafting your dream design to manufacturing and the construction of your home. Throughout the budget/design/build process, you will have a dedicated person here at Normerica to help with any questions you may have.

To learn more about construction timelines, budgets, and the overall process of building your dream timber frame home with Normerica, download our Residential Construction Guide.