Loans generally fall into two types: a residential mortgage — the kind we commonly use to buy a home to live in — and a development loan, used for construction and development. So if development is planned, you can often first buy the lot with a residential mortgage and switch to a development loan when development begins. Development-loan interest rates are higher than residential rates.
Rates differ meaningfully between lenders, which affects total cost. In real-estate investment and development, the choice of financing structure is critical. Broadly, common loans fall into two categories:
1. Residential Mortgage
The most common and lowest-barrier type, used mainly for:
- Buying a home to live in
- Simple investment property (rental)
- The holding stage (land banking)
Characteristics:
- Lower interest rate (usually the lowest of all loan types)
- Relatively standardized approval (income, credit, down payment)
- Suitable for long-term holding (25–30 year amortization)
- Modest requirements on the project itself (more about personal qualifications)
When to use: If you are simply buying land, holding, and waiting for appreciation — or have no clear near-term development plan — prioritize a residential mortgage.
2. Construction / Development Loan
When a project enters the actual development stage (building, subdivision, multi-unit development, etc.), you must switch to a development loan.
Characteristics:
- Interest rate clearly higher than a residential mortgage
- Funds advanced in stages (draw schedule)
- Greater focus on the project itself (cost, profit, feasibility)
- More complex approval (requires builder, budget, drawings, approval progress, etc.)
When to use:
- Detached-home rebuilds
- Duplex / Fourplex (1→2 / 1→4)
- Small development projects
3. The Practical Path (Very Important)
In Greater Vancouver, a common path for many development projects is:
Step 1: Acquire the land with a residential mortgage
- Lowers cost of capital
- Completes the acquisition quickly
- Locks in the project early
Step 2: Advance planning and approvals
- Survey
- Design (layout / DP)
- Municipal approvals (rezoning / BP)
Step 3: Switch to a development loan (construction financing)
- Before starting construction or after obtaining the Building Permit
- Replace the residential mortgage with a development loan
- Begin staged draws for construction
4. Why Not Use a Development Loan from the Start?
The core reason is one thing: cost.
- Development-loan rates are higher
- Funds are advanced more slowly (hurting competitiveness when bidding on land)
- They demand greater project maturity
So: use a residential mortgage in any stage where you can.
5. Summary
In essence, this is a question of capital strategy:
- Residential mortgage = a low-cost holding tool
- Development loan = a high-efficiency construction tool
Use the lowest-cost money to carry the longest time; use the highest-efficiency money to complete the development.
In addition, rates differ noticeably between lenders for both residential and development loans, so it is well worth comparing. Compare at least:
- 2–3 mainstream banks (RBC, TD, BMO, etc.)
- 1–2 credit unions (if the banks work out, you may not need a credit union)
Look beyond the rate to the overall structure, including:
- Whether there is a prepayment penalty
- Whether early conversion to a construction loan is supported
- Speed of funding (especially critical when competing on offers)
- Flexibility of conditions (income verification, corporate structure, etc.)
Make good use of a mortgage broker. A strong broker can:
- Approach multiple banks at once
- Help you secure a better rate
- Design a structure around your project (especially development projects)
In the current market:
- Profit margins are already compressed
- Cost control is therefore especially critical
So comparing rates is, in essence, “adding directly to project profit.”
