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Choosing Between Conventional or CMHC Construction Financing

January 08, 2024

If you’re a developer looking to start a new project, securing your construction financing is an essential early step. Your construction loan is designed to cover the cost of your build from start to finish, providing funding to purchase materials and pay workers as your project progresses.

Today, there are a couple of construction financing solutions available, each with unique advantages. Whether you choose conventional or CMHC construction financing will largely depend on your project type and timeline. Here, we examine the pros and cons of each financing solution.

Conventional Construction Financing

Conventional construction financing

Your typical – or conventional – construction mortgage will provide access to funds incrementally as your project develops. Many mortgage lenders will offer a construction loan and you can shop around to find the provider and solution that works best for you.

Benefits to conventional financing

The benefits of conventional financing are varied and meaningful for developers. For one, terms and conditions are relatively flexible and turnaround times for financing are generally short, allowing developers to move forward with their projects on a timely basis. Keep in mind, while several lenders in Canada offer construction financing, some can execute on the funds faster than others. It’s therefore worth finding out a lender’s typical speed of execution when selecting a financing partner.

Further, with a conventional construction mortgage, you’re not restricted to the type of project you plan to build. Whether you’re planning a retail construction project or for-sale construction projects such as condominiums and townhomes or even an industrial building, you’re not confined to residential rental construction as with a CHMC solution.

Drawbacks to conventional financing

Because a conventional construction mortgage means it is not insured, interest rates are typically higher than an insured mortgage to account for the risk taken on by the lender.

Also, as the developer, your equity requirements will be higher to qualify for a conventional mortgage – as a rule of thumb, the developer should have around 15% more equity in their project than with CMHC financing.

CMHC Construction Financing

CMHC construction financing

CMHC’s MLI Select multi-unit mortgage loan insurance product is a new and innovative construction financing solution that offers several advantages for developers looking to build rental projects that address social and environmental challenges. Offering a similar cadence when it comes to accessing funds as a conventional construction mortgage, CMHC construction financing comes with its own unique advantages and considerations.

Benefits to CMHC construction financing (MLI Select)

MLI Select provides borrowers with access to reduced premiums and longer amortization periods, based on the level of commitment to affordability, accessibility, and climate compatibility. In fact, the more committed you are to social and environmental outcomes, the better the incentives.

Interest rates are typically lower for this solution, and lending ratios are higher. What’s more, the equity requirements are lower, enabling an easier path to development all around.

Drawbacks to CMHC financing

Because the MLI Select product is explicitly designed to encourage developers to preserve and/or create affordable, accessible and climate compatible units, there are specific requirements you must meet in order to qualify.

For instance, your property must fall within certain type and size parameters – a minimum of 5 units, except for retirement homes where a minimum of 50 units/ beds is required and there are maximums for non-residential components (not to exceed 30% of gross floor area). There are also affordability, accessibility, and energy efficiency benchmarks the property must meet and financing is only available for rental apartment construction.

With a significant insurance premium fee and rigid terms and conditions, the solution can be limiting – and potentially a non-viable solution – for many developers.

How MCAP’s Commercial Mortgages Team Can Help

At MCAP, our Development Finance group understands the construction process and the financing needs that come with every step of your project. We can help guide you through the realities of rising development costs and offer offset solutions to help keep your business going strong. We will also recommend conventional or insured financing depending on the size, scope, and location of your project and help you determine the best next steps for your plans and needs.

Have questions?

Contact our Development Finance group to see how we can assist and guide you through the process.

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