Direct answer
For most investors, takeout. The builder carries construction; the buyer's insured mortgage funds at completion against a 5% deposit and demonstrated liquidity of about 10% of the price. A draw structure puts the insured construction loan, its progress advances and its interest during construction on the buyer, requires roughly twice the liquidity and adds execution risk in exchange for earlier control of the rate and the asset.
Key facts
- Takeout: builder finances construction; buyer funds the insured mortgage at completion against a 5% deposit and about 10% demonstrated liquidity.
- Draw: buyer is the construction borrower, pays interest during construction and demonstrates roughly 20% liquidity.
- Takeout concentrates risk at commitment; draw spreads it across the construction period.
The two structures
In a takeout the builder finances and delivers the building. The buyer signs a purchase agreement, pays a deposit, obtains a CMHC certificate of insurance and a lender commitment as completion approaches, and funds the insured mortgage on closing. In a draw structure the buyer is the borrower during construction: the insured construction loan advances in stages against progress, the buyer pays interest on advanced funds, and the loan converts to the permanent mortgage at completion.
Capital required
Takeout: the deposit, typically 5% staged as an initial amount on signing and the balance when conditions are waived, plus the CMHC application fee and legal costs, with liquidity of about 10% of the purchase price demonstrated for qualification. Draw: equity injected as construction proceeds, interest during construction, contingency for overruns, and liquidity of about 20% of the project cost demonstrated. Where the builder provides a closing fee allowance in a takeout, the buyer's net equity after closing can be a small fraction of the deposit; no equivalent exists in a draw.
Where the risk sits
Takeout risk is concentrated at commitment: the rate is set near completion, the loan is sized on the income the insurer accepts, and a holdback can apply if leases lag. Draw risk is spread across construction: cost overruns, schedule, lien holdbacks and the possibility that the completed building appraises below cost. The takeout buyer is exposed to the market once; the draw buyer is exposed to the builder throughout.
When draw is the right answer
Experienced operators with construction oversight capacity, liquidity well beyond the minimum and a view that rates will rise before completion can prefer a draw, because it lets them lock terms earlier and capture the developer's margin. For an investor whose objective is to deploy a defined amount of equity into stabilized rental income with the least operational involvement, the takeout is the structure the program was designed for.
Questions
Can a takeout buyer lock the rate early?
Rate locks depend on the lender and on how close the building is to completion. Some lenders offer early commitments at a cost. The research page tracks the CMB 5-year yield the takeout rate is priced from.
Who pays interest during construction in a takeout?
The builder, as part of its cost of delivering the building. The buyer's exposure begins at funding.
Sources
MLI Select: multi-unit mortgage loan insurance,
Canada Mortgage and Housing Corporation (CMHC)
Canadian bond yields: benchmark 5-year Government of Canada,
Bank of Canada
Canada Mortgage Bonds program,
CMHC
Standard underwrite model (this site),
Daniel Kim & Associates
Related pages
Reference material prepared by Daniel Kim & Associates, Sotheby's International Realty Canada. Not a recommendation to buy any property or security. Figures are illustrative and reviewed quarterly; complete independent due diligence with your counsel and accountant.
All reference pages