Top Strategies to Fund and Build a Custom Home in Toronto

A construction loan pays your builder in stages, so your plan needs to match the builder's payment schedule before you sign anything.

If you live around Toronto and want to build a custom home on the western shore of Lake Macquarie, the finance works differently from a normal home loan. The money is released as the build moves along, and your contract, your lender and your repayments all need to line up. Here is how to set that up properly.

How Does a Construction Loan Work for a Custom Home?

A construction loan releases money in stages to pay your builder as work is completed, rather than giving you the full amount on day one. Your lender approves a total loan amount, then pays out at set points through the build.

This is called a progressive drawdown. At each stage, your builder claims a payment, and the lender usually arranges a progress inspection before releasing funds. Lenders set their own rules on how many drawdowns you get, how long you have to finish the build and what fees apply, so these details differ from one lender to the next.

A broker can compare construction loan options from a range of lenders, which matters because these terms are not standard across the market.

Why Do You Only Pay Interest on the Amount Drawn Down?

During the build, many lenders only charge interest on the amount drawn down, not the full approved limit. That keeps early repayments low, though they rise with every payment to your builder. Check how your lender handles this, because terms vary.

NSW Government guidance says a borrower financing a project home must start mortgage repayments once the first progress payment is made and the loan is drawn.

As an illustrative example only, consider a buyer approved for a $500,000 loan for a custom build. We will use 6.75% p.a., an example rate and not a current offer, with interest-only repayments during construction.

• After a first draw of $50,000, interest is roughly $281 a month.
• After $250,000 has been drawn, it is roughly $1,406 a month.
• Once the full $500,000 is drawn, it is roughly $2,813 a month.

The trade-off is that the cost keeps climbing during the build, and you may still be paying rent or another mortgage at the same time. A buyer in this position would need to allow a buffer for the later stages, and whether and when the loan reverts to principal and interest repayments depends on the lender. You can test your own numbers with our loan repayment calculator.

Fixed Price Building Contract: What to Lock In Before You Apply

A fixed price building contract gives your lender a clear total cost, which makes the loan easier to assess. The trade-off is that changes you ask for later can add to the price, and that can leave you short on funds.

In NSW, work over $20,000 needs a large job contract that includes a progress payment schedule. Payments can be fixed amounts or percentages tied to stages, or claims for work done and costs incurred, backed by documents. Progress payments must match the work actually carried out. The maximum deposit is 10 per cent, and you get five clear business days to cool off.

Where Home Building Compensation Scheme cover is required, which applies to contracts over $20,000, your builder cannot ask for a deposit or other payment until the cover is in place and you have the certificate. Ask for this before any money moves. Check that your builder is a registered builder with the right licence for the work.

Can Your Lender's Draw Schedule Match Your Builder's Payments?

Your lender's construction draw schedule should match your builder's progress payment schedule, because gaps between the two can delay payments and the build.

When the builder claims a stage that your lender has not scheduled, someone has to cover the shortfall, and it is often you. Before signing, give your broker the builder's schedule and ask whether your lender can pay at those same points.

Building Commission NSW gives $250 to $500 as an indicative cost for each independent progress inspection. Ask whether your lender arranges and charges for inspections, and whether there is any progressive drawing fee, so the cost does not catch you off guard. Payments are only meant to match completed work, so a builder asking for money well ahead of progress is worth questioning.

What Does Council Approval Mean for Your Loan?

Most lenders want your plans and council approval in place before they will release construction funds. A custom design needs approval before building starts, and in Toronto that goes through Lake Macquarie City Council.

If your plans change after approval, the cost and timeline can change too. A lender may want to see the updated plans and costs. Settle your design and approvals before you commit to a firm loan, so the figures your lender assessed are the figures you build to.

How Much Can You Borrow to Build?

Your borrowing capacity for a build is assessed on your income and debts, and lenders test your ability to repay at a rate at least 3 percentage points above the loan rate. Banks regulated by APRA apply this buffer to all new borrowers.

This applies to a custom build too, so work out your numbers early. Use our borrowing capacity tool for a first look, then speak with a broker who can check it against specific lender policies. Lenders may also discount less stable income such as bonuses or overtime, so a broker can show how yours would be treated.

Is the First Home Owner Grant Available When You Build?

You may be eligible for the NSW First Home Owner Grant of $10,000 if you build a new home as a first home buyer, though conditions apply. For vacant land with a building contract, the combined value of the land, contract and any variations must not exceed $750,000.

If you need the grant at settlement or for your first drawdown, the application goes through the approved agent providing your finance. Otherwise, it is lodged within 12 months of settlement or completed construction. For contracts signed on or after 1 July 2023, you must move in within 12 months of completing construction or purchase, and live there for at least 12 continuous months. Confirm your eligibility with Revenue NSW, and read our first home buyers page for the wider picture.

Working With a Local Mortgage Broker in Toronto

A local broker can line up your loan, your builder's payment schedule and your approvals so the build keeps moving. Our team at the Toronto office knows how these builds are structured and can talk you through lenders and options for your plans.

Call one of our team or book an appointment at a time that works for you. Bring your plans, your builder's quote and any questions, and we will work out a finance plan with you before you sign your building contract.

Frequently Asked Questions