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Construction Loan

Learn about construction loans in Canadian real estate — how they work, who uses them, and their role in development financing.

Construction Loan

July 11, 2025


What is a Construction Loan?

A construction loan is a short-term, interim financing option used to fund the building or major renovation of a property, with funds disbursed in stages as work progresses.

Why Construction Loans Matter in Real Estate

In Canadian real estate development, construction loans provide liquidity during the build phase and are typically replaced with permanent financing at completion.



Key features:
  • Interest-only payments during construction
  • Draw schedule tied to inspection milestones
  • Higher risk, higher interest rates



Understanding construction loans helps builders, developers, and lenders manage financing risk and cash flow.

Example of a Construction Loan in Action

The developer secured a construction loan to fund the phased build of a 20-unit townhouse project, with draws released after inspections.

Key Takeaways

  • Funds new construction or major renovation
  • Short-term, interest-only during build
  • Replaced by permanent loan at completion
  • Disbursed in stages tied to progress
  • Involves higher risk and lender oversight

Related Terms

Additional Terms

Carrying Costs

Carrying costs, also known as holding costs, are the ongoing expenses incurred by property owners while holding real estate before it is sold,. more

Capitalization Rate

The capitalization rate, or cap rate, is a measure used to estimate the return on investment for an income-producing property, calculated as Net. more

Capital Reserve

A capital reserve is a fund set aside by property owners or condominium corporations for future major repairs, replacements, or improvements.. more

Building Inspection

A building inspection is a detailed assessment of a property’s condition, typically performed by a qualified inspector prior to purchase, sale, or. more

Build-to-Suit

Build-to-suit is a real estate development strategy where a property is custom-built to meet the specifications of a tenant or buyer.. more

Back-End Ratio

The back-end ratio, or debt-to-income ratio, measures the percentage of a borrower’s gross monthly income spent on total monthly debt obligations,. more

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