Definition
A construction loan finances the construction of a new property on a lot the borrower already owns or acquires simultaneously. Unlike a mortgage on an existing property, funds are not disbursed in full at the outset — they are paid in several draws according to a schedule tied to construction progress.
Typical draw stages: excavation and foundations, framing and roofing, building envelope (windows, doors), interior finishing, and final inspection. At each stage, the lender (or CMHC if the loan is insured) mandates an inspector who certifies progress before releasing the next draw.
During construction, the borrower pays only interest on disbursed amounts. At construction completion, the loan automatically converts to a standard amortized mortgage. Lenders typically require a 20-35% down payment on total cost (land + construction). CMHC insures construction loans with reduced down payments, under conditions.