Commercial Construction Loans Canada — Development Financing Guide
Ground-up construction and major renovation financing for Canadian developers. Understand how construction loans work, how draw schedules are structured, and how your project converts to permanent financing.
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What is a Commercial Construction Loan?
A commercial construction loan is short-term financing used to fund ground-up construction projects or major renovations. Unlike a conventional mortgage where the full loan amount is advanced upfront, construction loans advance funds in stages as the project progresses.
Construction loans typically have terms of 12–24 months, after which they convert to permanent financing. They carry higher interest rates than permanent mortgages to compensate the lender for construction risk — project delays, cost overruns, and market changes all create uncertainty during the build period.
How Construction Draw Schedules Work
Funds are advanced in stages (draws) tied to completed construction milestones. A qualified inspector or quantity surveyor certifies each stage before the lender releases the next advance. You pay interest only on the funds already drawn.
| Construction Stage | Typical Draw % |
|---|---|
| Pre-construction | 10–15% |
| Foundation complete | 15–20% |
| Framing complete | 20–25% |
| Mechanical / electrical rough-in | 15–20% |
| Drywall / interior | 15–20% |
| Completion / occupancy | 10–15% |
Draw percentages are illustrative. Actual draw schedule is negotiated with the lender and detailed in the construction loan agreement. A cost consultant or quantity surveyor often prepares the detailed draw schedule.
Construction Loan vs Permanent Mortgage
| Feature | Construction Loan | Permanent Mortgage |
|---|---|---|
| Term | 12–24 months | 5–10 years (amortized 20–50 yrs) |
| Rate | Prime + 2–5% | Prime + 1–3% or CMHC fixed |
| Payments | Interest only on drawn funds | Principal + interest |
| Advances | In stages per milestones | Full amount at closing |
| Purpose | Fund construction costs | Long-term property financing |
| Risk profile | Higher (construction risk) | Lower (stabilized asset) |
CMHC Construction Financing for Rental Apartments
CMHC MLI Select — Available During Construction
CMHC MLI Select is available for purpose-built rental apartment construction — not just stabilized existing buildings. This means developers can access the program's superior terms (up to 95% LTC, 50-year amortization) from the construction phase.
- Higher LTC than conventional construction (up to 90–95%)
- Construction converts seamlessly to permanent MLI Select mortgage
- Below-market permanent rates locked in during construction
- No pre-leasing required for purpose-built rental
Qualifying for a Construction Loan in Canada
Developer Experience
First-time developers face more scrutiny than experienced ones. Lenders want to see a track record of completed projects. Partnering with an experienced developer or hiring an experienced construction manager helps first-timers qualify.
Project Feasibility Study
Lenders require a detailed feasibility analysis showing projected costs, revenues, and returns. This typically includes a construction cost budget, pro forma cash flow, and market study supporting rental or sale projections.
Equity Requirements
Conventional construction lenders typically require 25–35% equity (LTC). CMHC can reduce this significantly for purpose-built rental. Personal guarantees from principals are standard for smaller projects.
Pre-Sales / Pre-Leasing
Condo construction typically requires 70–80% pre-sales before construction financing is available. Purpose-built rental does not require pre-leasing — lenders assess demand through market studies.
Construction Loan FAQ
Common questions from Canadian developers and builders.
Finance Your Development Project
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