More on the Construction Mortgage aka Draw Mortgage

Note: Before reading further, I want to stress that this is information is structured for an AVERAGE North American wanting to build an Earthship.  While I agree that mortgages are one of the things wrong with this world, we are unlikely to have Earthships become mainstream if we insist that everyone quit their jobs and move out to the boondocks in order to build one.  (Baby steps!) I admire those who can do this, but you are the proverbial 1%.  Less than that actually.  Even so, this style of mortgage is also going to discourage all but the most patient.  So high fives to anyone actually pursuing the goal.

I apologize, this is quite long.  So if you don't plan to mortgage your Earthship, save yourself the pain of reading it.  If you do plan on getting a mortgage, this information is quite important. If anything it will set you on the path of how to plan to pay for your Earthship.  I don't mean to discourage anyone, but if you truly want to live in a sustainable home, no one is going to roll out the red carpet for you. Plan your savings and start ASAP.

So I did some further research on the construction mortgage.  This time I pulled actual loan information from the Royal Bank of Canada (RBC).

For those who don't know, a construction mortgage is something you will need if you are going to finance your Earthship construction through a bank.  This style of mortgage unfortunately has some drawbacks, which are primarily a lot of up front costs.

Sadly this is going to reduce the amount of people willing to build an Earthship, but it's still a step ahead of the, "quit your job and go permaculture" scenario.  I hope that pioneers like myself can find a way to make this easier.

First, the home owner is going to invest a lot more than the average 20% down.  Think more like 30-40%. Especially if they want the bank to finance the land in addition to the build.

In a construction mortgage, most banks will only pay about 65% of the land cost.  So if the property is worth $200,000, they will only give $130,000 to buy it.  That leaves the borrower to pay $70,000 up front, before construction costs.  But it doesn't stop there.

After the land is purchased, the bank will then give the borrower one year to complete construction. During this period, the bank will dole out certain amounts of money to pay for materials and labour. These are called "draws", and there are usually 4-6 of them. They will also require an inspection before each new draw, to verify that work was completed.   This means the builder can't take years and years to complete the construction by themselves, which is what some Earthship folks would like to do.  And if the weather in the area limits build time (e.g. in Canada we have from April to about October), the builder may only have 5-6 months to get the house from dirt to lockup.  (Four walls, roof, windows and doors).

Knowing this, it is now necessary to figure out how much each stage will cost, because if a draw fails to fully cover the costs required to complete that stage, the builder must pay the uncovered costs out of pocket.  The bank will not give another draw if the work isn't complete and they don't care if the draw was enough money to pay the bills.  That's the borrower's problem!

Failure to be able to afford out of pocket costs could get ugly.  If the borrower can't get the funds to finish the build in time and the bank refuses to give any additional money, the risk is that the bank will cancel the mortgage and reclaim the property.   This is why it is important to know how much everything will cost.   Knowing this will help you predict draw amounts and therefore, additional savings requirements on top of the downpayment.

On my personal build, while all 5 draws appear to fully cover construction estimates, the bank still requires a 10% minimum contingency amount.  This means that the bank wants you to have approximately 10% of the value of the build in cash, in case something ends up costing more than anticipated.  After all, they are only going to provide the draw amounts.  If a contractor screws up or discovers something unanticipated, the bank is not on the hook for the extra costs.  The builder is.

So on a $200,000 build, that's about $20,000 in excess cash.  At this point, the amount to be saved is now $70,000 for the land plus + draw gap coverage + 20,000 in contingency funds.

Lastly, there is also another issue.  It is called a lien amount.  By law,  the provinces in Canada require a certain percentage of the draw funds received to be put aside for legal reasons; basically in case a contractor puts a lien against the property.   This can be anywhere from 5-20% of each draw amount.  So everytime the bank gives a draw, a lawyer will deduct about 5-20% of it and probably put it into a trust or escrow account.  While this amount will be refunded 30-60 days after the build is completed, it is still money that the borrower must pay from their own pocket.   On my project, this amount comes to approximately $20,000.

At this point, the total amount to be saved is now $70,000 + draw gap coverage + 20,000 in contingency and $20,000 for lien hold back.

For my build, this is a $110,000 - or approximately 30% of the mortgage amount. It's going to take a few years to save that up!

One might argue that a borrower could just get a mortgage for the land only and then pay for the build out of pocket over 5-7 years.   This is actually a decent idea, but it really depends on a number of factors, the main one being again, money and the rest patience.

I spoke to a mortgage specialist, and they pointed out that if you apply for a mortgage for a piece of empty land, the bank will require 50% down.  If your land is only $20,000, that's great! Then all this stuff about draw mortgages is pointless.

But if your land is $200,000, you still need to save $100,000.  At this point, saving the extra $10,000 could have you living in the house within 12 months instead of 5 years, not including the time it would take to save $100,000.  Who knows, it might be 10 years of living in apartments and shanties until the actual move in.  I'm personally not that patient.

The only way I could see circumventing this would be if there was a small house or trailer on the property, which changes the mortgage type.  If the bank considers it as being a regular home purchase, the borrower could go back to traditional mortgage rules and down payments.  It would still take 5-7 years to build the Earthship, but there would be less risk and less initial investment or savings time.

I'd say if you are patient and can get a regular mortgage, then go for it.   Otherwise, the construction mortgage may be the only option.  Start your research now and your savings now and this won't be impossible. Also make sure to put your savings into a high interest account so that you can earn some extra cash.

One a side note, this is situation is not great for the future of sustainable, green building on a larger scale.   If they can't be made affordable and easy for the average person, then they can't be expected to become mainstream.  It would be nice to see a builder take a risk and start producing these, but when it comes to money and cookie cutters, it's more profitable to just stick with tradition.


Planning to Build by RBC