How the Severance Process Impacts Construction Mortgages

Blog-Date-1Apr 29, 2021

Land severance is an important step in the development process when building a duplex or triplex. Often used for in-fill construction projects in urban environments, severances can greatly increase the overall value of a project by allowing one parcel of land to be divided into multiple parcels with freehold ownership. This allows each of the new homes being built to be sold separately with its own plot of land.

As a mortgage broker, you may have clients coming to you seeking financing for multi-unit residential projects. In this article, we help you gain clarity on how the severance process impacts construction mortgages so you can help your clients secure the best mortgage deals for their needs.

Understanding the severance process

In Ontario, the land severance process is overseen at the municipal level. While it is not particularly complex, the process can take time depending on how quickly and efficiently the municipality acts after receiving a severance application.

Before applying for a severance, it is important to ensure that the zoning at the construction site allows for the planned building type (e.g. duplex, triplex). If you and your client are not confident in applying for a severance yourselves, you can consider hiring a land use planner to help you with this process.

In general, there are three possible outcomes for your severance application:

  1. Approved
  2. Approved with conditions
  3. Denied

With a conditional approval, the municipality may indicate specific conditions that your client must meet for the severance to receive the green light. For example, conditions may require action related to easements, elevation, drainage, surveys, or other aspects of the property.

Your client will need to provide the municipality with proof that all stipulated conditions have been met for the severance to be finalized.

Impact of severances on construction mortgages

When applying to Pillar for a construction mortgage for a multi-unit project, we can lend at any stage of the severance process. However, the amount of the mortgage and any potential holdback will depend on where your client is in this process. In general, the further along they are, the greater the value of the mortgage we will offer and release:

  • Property already severed: You obtain an as complete, as severed appraisal report, and we use this for the underwriting process.
  • Property has severance approval with conditions: You obtain an as complete, as severed appraisal report, and we use this for the underwriting process. We assess the severance conditions and apply a holdback (e.g. 5%) of the as complete value until the severance conditions have been met.
  • Property requires severance. In this case, there are two lending scenarios:
    1. You obtain an as complete, not severed appraisal report, and we use this for the underwriting process.
    2. You obtain an as complete, as severed appraisal report, and we use this for the underwriting process. We apply a 15% holdback of the as complete value until the severance process has been completed.

DOWNLOAD: Severance Process

For the appraisal report, please note that it is up to you and/or your client to instruct the appraiser that you require the appraisal to be conducted on an as complete, as severed basis.

If a holdback has been applied, our team will move quickly to release the funds once we have the municipality’s confirmation that the conditions have been met. If the severance process is completed partway through the build, we will adjust the rest of the construction advances to reflect this.

Apply for a Pillar construction mortgage

To apply to Pillar for a construction mortgage with a severance, you can follow the usual Filogix application submission procedure. However, we require the following documents in addition to all the usual mortgage application documentation:

  • An as complete, as severed appraisal report
  • Severance approval from the municipality, including any conditions
  • Confirmation from the municipality that any severance conditions have been met (this can be submitted later if conditions are still pending at the time of application)

As always, our team is here to help you navigate the mortgage process and secure flexible financing for your client. For a visual illustration of the impact of the severance process on construction mortgages, please download our severances handout.

If you have a deal ready to go, simply submit your application to Pillar through Filogix or contact our business development team to discuss your needs.

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