Last week we discussed trying to build our own home with the assistance of a construction loan. This week we'll look at the same situation, with a twist that will save you literally thousands of dollars at the beginning...when you need it! Let me first identify the problems associated with building one's own home:

a) the lender will not let you build yourself without the watchful eye of a seasoned contractor, (at additional cost)

b) the lender will not allow you to build a shell of a house and finish it whenever you get money,

c) the lender will probably ask for Canada Mortgage & Housing Corp (CMHC) to oversee your project, (at additional cost)

d) construction lien holdbacks will necessitate higher retail prices for construction materials and labour,

e) every draw means new legal fees and appraisal fees,

f) this financing means having "big brother" looking over your shoulder during construction.

Now let's pretend that you have cash, you don't need financing, ...

you can build it yourself, at your pace, without CMHC, at a great price, without excess legal or appraisal fees. In other words, cash talks. Now let's deal with this cash stuff we were talking about. If one had cash, one would be able to do some tough negotiating, especially in these times. When we talk about building one's own home, the amount of money required is sizeable, so the old adage "money doesn't grow on trees" come to light. Having the availability of real estate as security for a loan is second only to actual cash money. If we had either, we would not be reading this article about borrowing to build.

Who do you know with real estate? Mom & Dad?! Sister or brother?! Aunt or uncle?! You will notice that all the above sources are relatives. You are actually looking for someone to lend you the equity in their residence to enable you to have the cash to build your own place. I believe there must be more than a business relationship for this to happen. When you have found the source for this equity, you present a line of credit application on their behalf to a lending institution of your choice, based on the value of their residence. You need a line of credit because these loans are "open", meaning you may pay it back without a penalty. That is important because once you have finished building you new abode, you can then negotiate a mortgage on it to pay back your "host house".

We all know that once the new unit has been built, that the value of the completed project is greater than the amount of money invested in land and building materials. Hopefully the amount of money owing is less than 75% of the value of the completed unit, thus saving you the high ratio insurance fee to CMHC (3% of construction costs). Avoiding the construction loan will help you get your project done faster and cheaper. For your benefactor, utilizing their home equity is your saving grace. Offer them a holiday or cash for having helped you in your endeavour. During construction, offer them a mortgage on your project for their added comfort. Next week, I'll give you a little anecdote that should help you go shopping for that relative.