Well I have had enough of these phone calls lately to blog about this because it drives me nuts. I often have people call me because they are shopping for a construction loan. And of course they want to know if they can get the loan, if they can qualify and then the rate and fees. When I tell them the going rate and fees in the GTA and they say “oh I got a way better rate than that from someone else”. So my next question is “what were you quoted?” and sure enough its some low rate that I know for sure nobody is lending that cheap on construction money. If you jump on that opportunity and go down the road with them to obtaining a commitment, I’m going to tell you that at the end of the day, the rate and fees will be the same as what I quote you and don’t be surprised if it takes weeks to get a commitment. In fact it might take months to close the deal.
It’s a bait and switch strategy. And I get really annoyed when people fall for this because you shouldn’t be so concerned about rate and fees. You should be concerned about getting a decent “real” commitment that performs until your finished construction. Anyone quoting some of the ridiculous cheap rates I’ve been hearing lately definitely do not know the market and are not experienced to package this loan request properly. Lender’s lend money strictly to make money. I arrange financing for the same reason. And the construction loan is a complicated loan process. We are committing to lending money on closing and working with you for the entire term. We will be working on your draw requests for the full duration of the project. We will be inspecting and releasing draws for a year. Lender’s who like these loans typically know construction or hire an expert who knows construction.
Best Case: 1st Mortgage 8% Interest Accrual and 2.% Lender Fee and that’s assuming you have 25% of your budget in cash and your project is in a lender heaven location like 2 doors up from Lake Ontario in Oakville and not far from the marina. Your building a 3 million dollar house and your NOA shows gross income of $300K per year and you’re a small builder that builds gorgeous 3 million dollar houses.
Typical Reality: 1st Mortgage 10% Interest Accrual and 2% Lender Fee. And that’s assuming it’s in the GTA and you have invested in your soft costs for about $50K. We are paying out an existing mortgage, your income and credit isn’t super great but OK and you’re a small builder and your going to make a couple hundred K from the project and you do this every year, might have 2 or 3 projects like this, same scenario.
Best Case: 2nd Mortgage 10%, Interest Accrual, 2.0% Lender Fee and once again your location is close to downtown off Lakeshore somewhere, it’s a lender nirvana location in the GTA and your 1st mortgage is a bank mortgage and your easily going to qualify for take out financing at the end because you make $200K per year with good credit and your going to live there so no worry about exit strategy for the lender.
Typical Reality: 2nd Mortgage 12-15% Interest Accrual, trades are paid direct and your 1st advance might give you a bit of cash for soft costs. You’re a small builder or a person who wants to improve the value of the house and the exit strategy is the sale of the property and hopefully you can qualify for take out financing.
And Broker fees are over and above these rates. My minimum fee is $2,000.00 and I usually charge same as the lender fee 2.0%.