The Holdback, the Surveyor and the Interest Reserve

A mortgage hands over the money on the day it funds. A construction loan does not. It pays in instalments against work that has already been done, it keeps a slice of every instalment until a statutory period has run, and it charges interest on everything released so far.

So the loan amount and the cash an owner must produce are two different figures, and the distance between them is where projects stall. This page sets out what that distance contains: the draw schedule, the holdback, the professional who certifies, the interest reserve, the fees at the front, and the money spent before any of it starts.

How does a construction loan actually advance money?

In instalments called draws, released after the work they pay for has been completed and inspected. The lender commits a total amount, then advances portions of it against progress on site. Nothing is released ahead of the work, so the owner or the contractor funds each stage first and is reimbursed afterwards.

The draw schedule is written into the commitment before closing, and it names the stages: excavation and foundation, framing and roof, mechanical and electrical, drywall and finishes, occupancy. Each stage carries a dollar amount. The trigger is completion of that stage, evidenced and certified, and never the calendar alone.

A draw request arrives as a package of documents. It carries the certifier's report on the percentage complete, the contractor's statutory declaration that subtrades and suppliers have been paid to date, an updated title search, the invoices behind the claim, and evidence that the money still undrawn will finish the scope.

Each of those steps takes days, and the days belong to the owner. A site visit is booked, a report written, a search ordered and a file reviewed, so two to four weeks between a request and a deposit is ordinary. The trades expect payment on their own terms throughout.

Who certifies a draw, and what does that certification cost?

An independent professional retained by the lender, usually a quantity surveyor or a project monitor, and sometimes the project's own architect on a smaller file. That person visits the site, measures what has actually been built, and reports a percentage of completion the lender will advance against. The owner pays for the work.

The report covers more than progress. It sets the budget against the signed contract, tests whether the funds left uncommitted will finish the scope, checks that the permits are current, and flags any change order that moved the number. A lender reads the cost to complete before it reads the percentage.

There are ordinarily two engagements. An initial review before closing prices the budget, the drawings, the contract and the contractor, and a report per draw follows for the life of the project. Both are quoted as fixed fees by the monitoring firm, and both are invoiced to the borrower.

Who pays is rarely negotiable: the lender selects the professional and the borrower settles the account, because the report protects the advance. This page states no percentage for it. Ask the monitoring firm for a written quotation covering the initial review and every expected draw.

What is the holdback, and why does the law require it?

A percentage of every payment on a construction contract that the payer must hold back and keep for a statutory period after the work ends. It exists to protect the people who supplied labour and material further down the chain, who have no contract with the owner and no other fund to reach.

The percentage is fixed by provincial legislation. In British Columbia the Builders Lien Act requires the person primarily liable on each contract and each subcontract to retain a holdback equal to ten per cent of the greater of the value of the work or material actually provided and the amount of any payment made on account of the price, as at 15 September 2026.

The owner funds that retention out of the same cash as everything else, because the lender advances against completed work while the retained slice is still owed. It leaves the project early and returns late, which is the whole of the difficulty.

Release follows the statute, and the statute is specific. In British Columbia, where a certificate of completion is issued, the holdback period expires fifty five days after that certificate is issued, and claims of lien may be filed no later than forty five days after the same date, both as at 15 September 2026. Count those days into the schedule.

What is a construction lien, and what does a release require?

A registered claim against the title of the property, filed by someone who supplied work or material and was not paid. It attaches to the land itself, which is why an owner who has paid the general contractor in full can still find the title encumbered.

British Columbia grants that right in its Builders Lien Act, under which a contractor, subcontractor or worker who performs or provides work, supplies material, or does both in relation to an improvement has a lien for the price of the work and material, as at 15 September 2026. The filing deadlines are short and counted in days.

Clearing a claim takes one of three routes. The claimant is paid and signs a release, or the claim lapses because it was not filed or not perfected inside the statutory window, or the owner pays the amount plus costs into court and the registration is cancelled against title. No lender advances while a claim sits on title.

So the holdback and the lien are one mechanism seen from two ends. The retained money is the fund a claim reaches, and the statutory period is the window in which it can be reached. An owner who pays the holdback out early has surrendered a protection and may pay twice.

What changes between Quebec and a common law province?

The name, the statute and the mechanics all change, because this is provincial law and Quebec is a civil law jurisdiction. The common law provinces run construction or builders lien statutes with a registered claim of lien. Quebec runs the legal hypothec of persons having taken part in construction, under the Civil Code.

The Civil Code of Quebec provides that a legal hypothec in favour of the persons having taken part in the construction or renovation of an immovable may not charge any other immovable, and that it exists only in favour of the architect, engineer, supplier of materials, workman and contractor or subcontractor, as at 15 September 2026. It need not be published to exist.

The timing sits in the Code as well. The hypothec subsists for thirty days after the work is completed even where it has not been published, a notice must be registered before those thirty days expire, and it is extinguished six months after completion unless the creditor publishes an action or registers a prior notice of the exercise of a hypothecary right, as at 15 September 2026.

Two conclusions follow for an owner. Confirm the rule in the province where the building stands, since a deadline learned on a file in one province is simply wrong in another. And put a construction solicitor from that province on the file before the contract is signed, because the deadlines are unforgiving.

What is an interest reserve, and what happens when it runs out?

A portion of the loan set aside at closing to pay the interest accruing on the funds already drawn. A building under construction earns nothing, so there is no rent to pay the lender from. The reserve is the lender advancing an owner the money with which to pay the lender, and it is loan proceeds.

Interest is charged only on what has been advanced, so it starts small and grows with every draw. The lender capitalises it, meaning the accrued amount is added to the loan balance as it arises, and the reserve is sized on an assumed draw curve and an assumed completion date. Both assumptions belong to the lender.

A project that runs six months long keeps accruing interest after the reserve is exhausted, and the shortfall becomes a cash call on the owner at the worst moment, with the building unfinished and no income arriving. A lender may agree to extend and to top the reserve up, and an extension carries its own fee.

A tax consequence rides alongside it. The Income Tax Act denies a deduction for an outlay that can reasonably be regarded as a cost attributable to the period of construction, renovation or alteration of a building, and requires it to be included in the cost or capital cost of the building instead, at subsection 18(3.1), as at 15 September 2026.

Which fees are charged at the front, and why is a commitment fee cash?

Several of them, and they fall due in cash on or before the day of closing. A commitment fee, a lender or arrangement fee, a broker fee where one is involved, legal fees for the lender's counsel and for your own, an appraisal, the initial monitoring review, and title insurance where the lender requires it.

A commitment fee is earned when the commitment is issued, so it is payable whether or not a single dollar is ever drawn. It is a sum leaving the account on one specific day, and it does not amortise across the term the way a rate does. Reading it as a cost spread over the project understates that day.

Other items land on the same day. Registration charges, the survey or real property report, the builder's risk insurance premium, a performance bond premium where the contract calls for one, and the retainer the lender requires before instructing its solicitor. Some are refundable, most are not, and all precede the first advance.

A lender will often deduct its fees from the first advance, which reads like a convenience. The first advance is already reimbursement for work the owner has paid for, so netting fees out of it moves the cash requirement forward by a month. The money still comes from the owner.

What is paid before any draw exists, and why is none of it on the pro forma?

Everything that must exist before there is any work to certify. Drawings from an architect, structural, mechanical and civil engineering, a land survey, geotechnical testing, permit application fees and development charges, a building permit deposit, utility deposits on new or transferred accounts, and the contractor's mobilisation deposit.

These land in sequence over months, and most are spent before the loan closes, because a lender will not issue a commitment without drawings, permits and a priced contract to read. The owner funds that entire front end out of pocket while the application sits in an underwriting queue.

A pro forma is built to show what the finished building produces. It carries a purchase price, a construction budget, a stabilised income figure and a valuation, and every line in it describes an end state. The requirement described here is a timing problem, and timing appears nowhere on a document with no dates on it.

So build the second document. A month by month cash schedule listing every outflow by the date it falls due, every draw by the date it is realistically deposited, the holdback as money gone until release, the interest reserve, and the closing fees. Then read the cumulative line at the bottom.

What does the cash requirement look like on a hypothetical project?

Larger than the equity line on the pro forma, and the arithmetic below shows the shape of it. The figures are invented in round numbers on a project that does not exist. They are illustrative arithmetic, not a quotation, not a projection, and not drawn from anyone's actual file. Your own numbers will differ on every line.

Take a construction budget of two million dollars, with a lender committing one million six hundred thousand of it and the pro forma showing four hundred thousand of owner equity. Soft costs before closing run to one hundred and twenty thousand. Fees on closing day come to sixty thousand. A ten per cent holdback on the contract is two hundred thousand.

Now walk the cash. The hundred and twenty thousand leaves before a commitment exists. The sixty thousand leaves on closing day. The two hundred thousand of holdback is retained through the job and the statutory period after it. Because every draw reimburses work already paid for, about a month of billing runs ahead of each deposit, roughly one hundred and thirty thousand at any time.

Add those together. One hundred and twenty, plus sixty, plus two hundred, plus one hundred and thirty of float, is five hundred and ten thousand dollars of cash the owner has to produce, against a pro forma that showed four hundred thousand. The gap is one hundred and ten thousand dollars, and none of it is a cost overrun.

Two features of that number matter more than its size. It is needed earliest, before any advance, at the point where the owner has the least evidence that the project works. And it returns latest, because the holdback comes back only once the statutory period has run on a finished building.

What routes do owners use to cover it?

Six recur on Canadian files, and this page ranks none of them. Cash reserves held for the purpose, a line of credit secured on another property, a private or bridge lender, a partner's capital, a vendor balance left in on the land purchase, and an advance against an accumulated participating whole life contract.

Cash reserves cost no interest, no application and no fee. What gets given up is the reserve itself, the money that was sitting there for a mechanical failure or a legal problem arriving mid project. The attribute that matters is immediacy: it is available the same day and nobody has to be persuaded.

A line of credit secured on another property costs interest on the drawn balance, plus an appraisal and legal fees. What gets given up is the encumbrance on that property and the covenant attached to it. The attribute that matters is price, and its weakness is that the facility stays reviewable.

A private or bridge lender costs the highest interest on the list, plus a lender fee, a broker fee, legal fees and an appraisal, all earned even on a short hold. What gets given up is margin, since the cost comes straight out of the project's profit. The attribute that matters is speed.

A partner's capital costs a share of the project, and a share is permanent in a way that interest never is. What gets given up is control, because a co owner arrives with consent rights, an exit expectation and opinions about the scope. The attribute that matters is patience: no payment and no maturity.

A vendor balance left in on the land purchase costs interest at a rate negotiated with the seller, and ordinarily ranks behind the construction charge, which a construction lender may refuse. What gets given up is a continuing relationship with the previous owner. The attribute that matters is timing, since it has to be raised before the offer is signed.

An advance against an accumulated participating whole life contract costs interest set by the insurer, and an unpaid balance reduces the death benefit. What gets given up is the contract's own compounding on the amount advanced, participations included. The attribute that matters is certainty of access: the advance arrives on a written request, with no credit decision and nobody able to call it.

That last route carries an honest limit and the limit is severe. A contract funded for two years holds very little cash value, so the advance available against it is small, and drawing it empties an instrument meant to compound for decades. A participating whole life contract is insurance and it is not an investment, and nobody should buy one this year to fund a project next year.

What should be settled before the first shovel?

Six things, and every one of them is cheaper to settle now than to discover in month five. The total cash requirement including the holdback, the draw schedule and its realistic deposit dates, the certifier and the fee, the interest reserve and the extension terms, the lien law of the province, and the exit.

Write the cash requirement down as one number and put the holdback inside it. The retained percentage stays the owner's money, held for a statutory period, and a budget that treats it as a saving on the contract price will be short by exactly that amount on the day the trades finish.

Agree the draw schedule and the certifier before closing, because both are negotiable then and neither is afterwards. Ask how many draws the commitment permits, what each one costs in monitoring and legal fees, and how many days the lender takes from a complete request to a deposit.

Ask what the interest reserve assumes. Which draw curve, which completion date, and what happens on the day it is exhausted. Get the extension terms in writing at commitment, while the file is healthy and the negotiating position still exists.

The exit is the take out financing and it has a date. Write down the month the work ends, the month the building is occupied and paying, the month the holdback releases, and the month a term lender could realistically fund, then check that every borrowed dollar carries a term reaching that month.

Who this suits, and who it does not

It suits an owner who has built before, who reads a commitment letter for the draw mechanics and not for the rate alone, and who has already learned that the cash requirement and the equity line on a pro forma are different numbers. It suits an owner whose capital can wait out a statutory period.

It suits an owner whose capital is patient. A partner's money, a vendor balance and a long funded participating whole life contract share one feature: none of them has to be repaid next quarter, and a holdback released months after the last invoice is exactly the exposure that punishes short dated money.

It does not suit a first project funded to the dollar, because the arithmetic above is what an ordinary file looks like. It does not suit an owner buying a contract this year to fund a build next year, the wrong instrument on the wrong timetable. And it does not answer the tax question, which belongs to a CPA who can see the file.

Where a participating contract does and does not belong beside a portfolio is described on the real estate investors page. The months of carrying cost on a repositioning are a different problem with a different shape, and they are set out in funding the renovation gap on a repositioning.