Construction Mortgage: Understand Progress Draws
Know which construction stages trigger each draw and which inspections and invoices the lender will require.
In this article
A construction loan is unlike any other mortgage. The money is not released at signing, but in draws, at the pace of the worksite: foundations, framing, building envelope, finishing. Each draw depends on an inspection ordered by the lender and on the contractor's invoices. Interest runs on the amounts released and is paid during construction, on top of your current housing. Budget for this double burden for the whole length of the build. The real breaking point is between the draws. The trades' invoices and the lender's disbursements never land on the same day, and an inspection adds delays. The cash reserve set aside for these gaps makes the difference between a site that moves and a site that stalls. At key handover, the loan converts to an ordinary mortgage. This article details the draw schedule, the budget for the construction period and the size of the reserve that keeps the site going. That reserve appears in no builder's quote.
Follow the draw schedule
A construction loan does not release the approved amount at signing. It frees it in tranches, each tied to a completed construction stage. The typical schedule has four or five draws: foundations poured, structure and roof closed, envelope sealed, finishing, handover. The contract specifies the percentage released at each stage and the criteria to meet. This mechanism protects the lender against an abandoned site. It also puts a cash-flow constraint on the borrower that few people expect: the money arrives after the work, never before. So line up the loan's calendar with the contractor's from the day you sign the construction contract. Otherwise the two schedules will contradict each other throughout the project.
Prepare the inspections and invoices
Each draw is triggered by proof, and the proof takes two forms: an inspection ordered by the lender, which confirms the actual progress, and the contractor's invoices for the work done. These checks add delays, often five to ten business days between the request and the payment. Build them into the trades' payment calendar. The lender sometimes also requires subcontractors' releases, as protection against construction legal hypothecs. Coordination falls to the borrower. Request the inspection as soon as the stage is reached rather than afterward, gather the invoices in advance, and tell the contractor the real payment delays, so they do not count on funds that will arrive a week later.
Budget the construction interest
During the build, interest accrues on the amounts already drawn and is paid monthly, on top of your current housing. This double burden lasts the whole construction, six to twelve months depending on the project. It grows as the tranches are released: the final months cost far more than the first. Do the calculation in advance, tranche by tranche, so you know the total sum you will have to absorb before the keys are handed over. Some lenders offer to capitalize this interest into the loan. That eases the monthly budget but raises the final balance. At handover, the loan converts to an ordinary mortgage and normal amortization begins.
Fund the gaps between tranches
The breaking point of construction projects is between the draws. The contractor bills the plumbing before the next tranche is released, the inspection adds days, a trade asks for a deposit. Without a cash reserve, the site stalls or the credit card takes over at twenty-one percent. Size the reserve on the largest foreseeable gap between an invoice and its matching draw. On a residential project, that is often around fifteen to twenty-five thousand dollars. Set it aside before the first shovel goes in the ground. This sum is not a cushion for surprises. It is a cash-flow tool: it works throughout the build and goes back where it came from at the end.
Quebec scenario
A couple in Sainte-Brigitte-de-Laval is building their home, using a type of financing neither of them knows. A construction loan does not hand over $450,000 on day one. It pays out in draws, at the pace of the worksite, and that mechanism sets the rhythm of the whole year. The schedule in the contract names the stages that trigger each draw: foundations, framing and roof, building envelope closed, finishing. Each tranche is released only after an inspection ordered by the lender and on presentation of the contractor's invoices. Interest runs from the first draw, on the amounts released only, and is paid during construction on top of their current rent. This double burden lasts seven months, and the couple budgets for it in advance. The surprise comes from cash flow: the contractor bills the plumbing before the next tranche is released, and the inspection adds five days of waiting. The $25,000 reserve, set up for these gaps, absorbs the lag. Without it, the site would have stalled or the credit card would have stepped in. At key handover, the loan converts to an ordinary mortgage. The couple keeps one lesson for friends dreaming of the same project: in a construction loan, the cash you have between two draws matters as much as the rate.
Checklist
- Read the draw schedule in the contract
- Identify the stages triggering each tranche
- Plan for the required inspections and invoices
- Budget the interest during construction
- Count the housing-plus-site double burden
- Build the between-draws reserve
- Track the alignment of invoices and draws
- Allow for inspection waiting days
- Prepare the conversion to an ordinary mortgage
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