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My spouse and I have never had a mortgage. We're pre-approved for about a $600k mortgage, which we want to use to buy an older house to tear down and completely rebuild. The initial price on these houses will probably be less then $300k.

My question is: how would the mortgage work? Would it be a construction mortgage? Since we're buying and demolishing but never really living in it would that count? Would the first time buyer tax benefit as well as taking money out of rrsp for downpayment work? (How would the downpayment work here?)

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    From what I know the bank will not allow you demolish an old house until the mortgage on it is fully paid, since the house is the guarantee for the mortgage. You are able to renovate it, but not demolish it. You should check that first with your lender. – Nick S Oct 15 '17 at 14:53
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    You should probably discuss this with whoever pre-approved you. Tell them your plan and see how that conversation goes. – NotMe Oct 15 '17 at 17:38
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    I wouldn't call a house built in the 1940s-1960s "very old" – yoozer8 Oct 15 '17 at 20:54
  • I've edited this question to remove the less relevant items - for questions on how much you should expect to pay for a house, you will need to go to local construction firms - that's something that is very location dependent, and not well suited to a site like this about personal finance. For the remaining questions you're asking, you may still find few people wanting to answer as you are asking many questions at once. Limiting your question to something specific may help you to get more responses. – Grade 'Eh' Bacon Oct 16 '17 at 13:00
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    I've read that buy, demolish, and rebuild much larger and more luxurious is relatively common in areas where property prices have ballooned in recent decades; so I assume that banks do offer some sort of funding to cover this sort of project. Being outside the standard it's probably more expensive than a normal loan. To protect themselves against losses from the project not being completed I suspect they'd want a down payment equal to the value of the home itself. (ie the preconstruction part of the loan only being for the land, with the house being 'bought' for cash.) – Dan Neely Oct 16 '17 at 13:26
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I'm guessing you were pre-approved at a Big 6 bank. They are expecting you to find a house that you want to live in that requires no tear-down. I would recommend contacting a mortgage broker and asking them. A mortgage broker knows far more lenders than the Big 6, and can find a lender who is interested in working with you. One way to structure the deal would be a traditional mortgage for the value of the land only, followed by a construction loan once the purchase is complete.

A mortgage broker can help you figure out the best structure for your deal and find you the best lender to work with you, without harming your chances of success. The broker will do all this for you before approaching a lender.

  • "One way to structure the deal would be a traditional mortgage for the value of the land only, followed by a construction loan once the purchase is complete." So what's paying for the house that's currently standing there (are you implying the OP pays cash for the rest)? What you describe sounds like what you would do to just buy a plot of land. – chepner Nov 22 at 19:16
  • If the price the seller wants for the land & building is less than or equal to what the lender values the land at, the building is essentially free. If the seller assigns value to the building, the buyer may have to pay for that portion without the help of a mortgage (ie. cash reserves, HELOC on another property) In some cases the condition of the building may be a liability, reducing the value of the property. In this case the buyer may make a conditional offer stipulating the building be removed as part of the purchase agreement. – Jerry Penner Nov 22 at 19:31

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