When comparing our small lot vs. attached duplex development options, I’d heard that financing would likely be more straightforward for a small lot subdivision because we’d have a legal bare lot as security for the lender. With the attached option, we wouldn’t have much until the building is finished.

I’d found a private lender who was not scared off by a duplex/existing building reno; with more flexibility than a bank or credit union, but at a higher interest rate (8-10%). For our project, they would loan one (big) amount to cover our current mortgage and the construction financing. We’d only pay interest on the amount spent, but from day one we’d be paying 8-10% on our current mortgage. With a 10 month construction period, that translates to about $38,000 in interest just for our existing mortgage, and we’d be paying interest in the realm of $50,000 for the whole build. Ouch.

I talked with some other people who have more experience with this stuff, and they suggested we talk with the local credit unions. They will be more conservative than a private lender and more flexible than a big bank, but with interest rates more in line with big bank rates. So I called up a couple of local ones.

The first thing that caught my attention were their rates. Prime + 2% for the construction financing. So, more like 4.7%, which is a heck of a lot better than 8-10%.

Generally speaking, this is how a credit union would structure the lending:

1. We would terminate our existing mortgage (paying the penalty that is stipulated in our terms – in our case, 3 months’ interest).
2. We would take out a standard residential mortgage for the existing house, at standard mortgage rates (say 2.8%), which will always be kept separate from the construction loan.
3. We would take out a construction loan for the new build/major reno. They will charge a 1% construction financing fee and will lend 75-80% of the project’s appraised final value. The 20-25% we need to put in can be a combination of cash and equity.
4. Similar to the private lend, we would only pay interest on the money actually spent. The money is drawn corresponding with project construction milestones (as verified by an appraiser) – also the same as the private lender.
5. We would have to self-finance to a point. That point is AT LEAST after approval of rezoning, but depending on which option we pursue, and who the lender is, may vary beyond that. For the small lot subdivision, it’s likely we’d have to self-finance past rezoning approval and to the approval of the subdivision, which may or may not include completion of the subdivision. This is a pretty big grey area, since the cost to fully service the lot (required to complete the subdivision) was quoted to me by the city as being in the realm of $25,000 – $30,000.

One of the credit union mortgage specialists I talked with got really nervous when I told her we were raising the existing house. She said that in this situation, they might be limited to lending based on land value alone. The other credit union rep I talked with, on the other hand, said they were comfortable with house-raising (and in fact, she enjoyed seeing the pictures of the lift in progress).

In conclusion: The local credit unions offer better rates and a more attractive solution for either of our proposed options. The difference in costs between private lender rates and credit union rates could be as much as $30,000, which is a significant amount of money for a small project like ours. And it’s money that would disappear with no equity coming out the other end. We will be much better off going through a credit union provided we can meet their requirements. Also, the credit unions seemed comfortable with either option: small lot subdivision or attached duplex.

I would recommend calling several lenders as you’re planning your own project – private lenders, big bank, and credit unions. Even among the credit unions, their comfort level with our particular project varied.

And on that note, Happy Canada Day!