A construction draw mortgage is a loan that funds a new build or a major renovation in stages, releasing money at set construction milestones rather than in one lump sum. You pay interest only on the amount advanced so far, and once the work is finished the loan usually converts into a regular mortgage with normal principal and interest payments.
That structure solves a real problem. A builder or homeowner needs cash at several points across a project, not all on the first day, and a lender wants to know its money is going into the building and nowhere else. Releasing funds in measured draws, each one checked before it goes out, keeps both sides protected. What most online guides leave out is the part that actually creates risk for an Ontario owner, the holdback rule under the Construction Act. We cover that below, because it is where we most often see people get hurt.
What is a construction draw mortgage?
A construction draw mortgage finances construction as it happens. Instead of advancing the full loan at closing, the lender and borrower agree on a draw schedule that ties each release of money to a stage of the build, such as the foundation, the framing, and the finishing work. Before each draw, the lender usually orders an inspection or an appraisal to confirm the work claimed is actually done and the project is on budget.
During construction you generally make interest only payments on the funds drawn to date, which keeps your carrying costs lower while the property cannot yet be lived in or rented. When the build is complete, the loan typically converts to a conventional mortgage and you begin paying principal and interest on the full balance. Lenders use this approach for new homes, custom builds, and substantial renovations where the value of the property changes as the work moves forward.
How is it different from a regular mortgage or a HELOC?
The right financing depends on what you are building and how much equity you already have. Here is how the three options most Ontario owners weigh up compare.
| Feature | Construction draw mortgage | Completion mortgage | Home equity line of credit |
|---|---|---|---|
| How the money is released | In stages tied to construction milestones | One advance, only when the home is finished | Revolving, you draw as needed up to a set limit |
| When you pay interest | Only on the amount advanced so far | On the full amount after completion | Only on the balance you have used |
| Inspection before funds | Usually before each draw | At completion | Not tied to construction |
| Typical use | Building new, or a renovation financed as the work goes | Buying a builder built home that closes when ready | Smaller renovations where you already hold equity |
| Term | Short term during the build, then converts | Standard mortgage term | Open ended revolving credit |
A home equity line of credit can work for a contained renovation if you have enough equity in your current home. For a build from the ground up, or a renovation large enough that the property is unusable partway through, a draw mortgage is usually the structure lenders expect.
How the draw schedule works
Most residential draw schedules follow the same construction stages, with a percentage of the loan released at each one. The exact split varies by lender and project. A common pattern looks like this.
- Foundation draw, released once the foundation and footings are in.
- Framing draw, released when the structure is built and enclosed.
- Lockup draw, released when exterior doors and windows are installed and the building is weather tight.
- Drywall or interior draw, released after insulation, drywall, and the rough in work are done.
- Completion draw, the final release once the home is finished and ready to occupy.
Each draw is paid out only after the lender confirms the stage is complete, usually through a progress inspection or an appraiser report. If an inspection shows the work is behind or over budget, the lender can hold the draw until the issue is resolved, which is one reason a contingency cushion matters.
The holdback rule most articles miss
This is the part that catches Ontario owners off guard, and it is the main reason a lawyer belongs on a construction project. Under Ontario’s Construction Act, anyone who pays for an improvement to land has to hold back 10 percent of each payment to their contractor. That 10 percent, called the basic holdback under section 22 of the Act, has to be kept until the time for registering construction liens has passed.
Why it matters to you
If you pay your contractor every invoice in full and a subcontractor or supplier further down the chain does not get paid, that unpaid party can register a construction lien against your property. If you did not keep the holdback, you can be left personally responsible for it, and in practice you can end up paying twice for the same work. Keeping the 10 percent is what limits that exposure.
The deadlines are short
A lien has to be preserved, meaning registered on title, within 60 days of the project being completed, abandoned, or certified as substantially performed. It then has to be perfected, meaning backed by a court action, within another 90 days. Those windows are why a lender will not simply hand over the next draw on request.
Where your lawyer’s title work earns its fee
Before each advance, your lawyer or the lender’s lawyer subsearches title to confirm no lien has been registered since the last draw. Under the Construction Act a lender advance generally keeps its priority over a later lien only to the extent the money went out before the lien arose, and only if the required holdback was maintained. Releasing a draw without that check can quietly cost the lender its priority, so the check is not a formality.
Note that the Construction Act changed on January 1, 2026. For longer projects, accrued holdback now has to be released on a yearly cycle rather than only at the end, with specific notice steps. The 10 percent holdback itself, and the 60 and 90 day lien deadlines, did not change. Because rules like these move, confirm the current details for your project before you rely on them.
So what do you do. Keep 10 percent of every payment to your contractor set aside, do not release it until the lien period has run, and make sure whoever handles your advances is checking title before each one.
How a real estate lawyer helps with a construction draw mortgage
A draw mortgage has more legal moving parts than an ordinary purchase. A real estate lawyer can review the lender commitment and the building contract so you understand what each advance depends on, search and subsearch title to keep the advances clean and protect priority, confirm the property is free of liens or other claims before money goes out, and handle the closing and the conversion into a conventional mortgage at the end. If a dispute arises with a contractor or over a lien, having had a lawyer involved from the start makes it far easier to sort out.
We act for buyers, owners, and lenders on residential and commercial real estate across Ontario, from our offices in Toronto and Ottawa.
A typical construction draw mortgage scenario
The following is a simplified general illustration, not a specific client matter, and outcomes always depend on the facts.
Suppose an owner finances a $400,000 renovation through a draw mortgage. The lender advances roughly 20 percent at the foundation stage, another portion at framing, again at lockup, again after the interior work, and the final amount on completion. The owner pays interest only on what has been advanced, so the early payments are small and grow as the build proceeds. Throughout, the owner keeps 10 percent of every payment to the contractor as the holdback, and the lawyer subsearches title before each advance. When the work is done, the loan converts to a regular mortgage on the full balance.
Frequently asked questions
Can I get a construction draw mortgage to build on land I already own?
Often yes. Lenders generally want to see that you own the land, or they may let the land purchase form part of the first advance. You will need a detailed construction plan, a budget, and information about your builder. Requirements vary by lender, so it depends on the project and your finances.
Do I really have to hold back 10 percent if I trust my contractor?
The holdback is a legal requirement under the Construction Act, not a comment on your contractor. It protects you if someone further down the chain, a subcontractor or a supplier, goes unpaid and registers a lien. Keep the 10 percent until the lien period has passed, even on a project that is going well.
What happens if a construction lien is registered during my build?
A registered lien can stop your next draw and has to be dealt with before the project moves on, usually by paying the amount, posting security, or going to court to have it vacated. The deadlines are tight, so get advice quickly. This is exactly the situation the holdback and the title checks are meant to contain.
How long does a construction draw mortgage last?
It is short term by design, lasting through the build. When construction is finished it usually converts into, or is replaced by, a conventional mortgage with regular principal and interest payments. Some owners refinance at that point to lock in different terms.
Who pays for the inspections before each draw?
The borrower normally does. Each progress inspection or appraisal that the lender orders before releasing a draw is a cost you carry, which is why it belongs in your budget from the start.
Can one lawyer act for both me and the lender?
Sometimes, where there is no conflict, but not always. On many construction advances the lawyer client is the lender, and their role is to protect the lender security. Ask early who your lawyer is acting for, so you know whether your interests as the owner are separately covered.
The information provided above is of a general nature and should not be considered legal advice. Every transaction or circumstance is unique, and obtaining specific legal advice is necessary to address your particular requirements. Therefore, if you have any legal questions, it is recommended that you consult with a lawyer.
