Earlier this month, the federal government unveiled the Secondary Dwelling Refinancing Program, scheduled to launch on January 15, 2025, which will allow homeowners to refinance up to 90% of the value of their property (capped at $2 million) to add up to four rental units. such as basement apartments, in-law suites or laneway homes.
Short-term rentals are excluded because the goal of the program is to boost rental housing in high-demand areas and help homeowners offset mortgage costs. For an in-depth review of the program guidelines, see Mortgage Trends in Canada previous coverage here.
With 30-year amortizations on refinanced, insured mortgages, this program revives a discontinued 2016 initiative and targets today’s tight housing supply and affordability crisis. For homeowners ready to ease financial strain and add steady rental income, this might be a smart move in today’s market.
Better Federal Loan Program for Small Renovations
That said, I find the Secondary Loan Loan Program (SSLP), introduced as part of the 2024 Federal Budget in April, much more attractive than the refinancing option.
Through the $409.6 million program, homeowners can access up to $40,000 in low-interest loans to build or renovate secondary suites such as basement suites.
It’s a great way to generate additional rental income or adapt to multi-generational living without breaking the bank.
However, $40,000 is not enough in my opinion. Personally, I’ve received several quotes from contractors over the past few months for a basement renovation, and it seems easy to spend $60,000 to $75,000 without doing anything crazy.
This new loan program is undoubtedly a step towards increasing housing density, allowing for better use of available space in communities across the country. By allowing homeowners to add accessory dwelling units, it helps address the housing shortage in a practical way, adding more rental units without the need for large-scale new developments. It’s a smart decision to maximize what we already have, especially in areas where space is limited.
Secondary suite refinancing program: ideal for larger projects
If you’re planning to build something larger, like a shed or a laneway house, the $40,000 loan won’t go far. That’s where the secondary suite refinancing program comes into play.
Both the CSSLP and the refinancing program aim to create more living space and help alleviate the housing supply problem. But adding a secondary suite isn’t cheap. Between construction, legal fees, and making sure everything meets municipal zoning and code requirements, it requires careful budgeting.
This program fits well into the trend of multigenerational living, offering families a way to create living spaces for parents or adult children. But let’s be clear: While this helps increase rental options, it’s not a solution to the housing crisis. To truly solve this problem, we need greater investment in new construction and broader accessibility policies.
I like that the additional funding should not exceed the costs of the renovation project, otherwise things risk getting really out of hand.
Additionally, in my opinion, if you are considering taking on a project of this size, you must have a solid financial foundation, meaning at least 20% of the equity in your home, even if I would even recommend 35%. Having just 10% equity in a $2 million property seems risky and, frankly, irresponsible.
Just because you can borrow as much doesn’t mean you should.
Consider the $2 million refinance option: On paper, it sounds attractive. But financing $1.8 million at a 4.5% interest rate means monthly mortgage payments of $9,075. On top of that, you would face a substantial CMHC insurance premium, potentially adding $66,600 (at 3.3%) to your loan. This brings your total mortgage to $1,866,600 on a $2 million property, leaving you with minimal equity and limited financial flexibility.
Now imagine having to sell that house later for $2 million. After paying a 5% commission and HST, you are left with only $20,400. That’s not even enough to cover prepayment penalties or legal fees!
It’s a slippery slope. While these programs offer some solutions, they carry real financial risks if not managed carefully. I am even more comfortable as the amount of mortgage required is low. Why announce a new cap of $1.5 million on insured purchases, then, a few weeks later, announce this refinancing program up to $2 million?
The essentials on the new secondary housing programs
My bottom line: the CSSLP loan limit should be increased to $75,000. In today’s market, it is almost impossible to finish a decent sized basement for less than $40,000.
And regarding the secondary suite refinancing program, I understand that some in our community are quite optimistic about how it could stimulate activity once the details are finalized and lenders and insurers are fully agree.
However, I personally don’t expect high demand. And I’d much rather have a $1.5 million cap than the current $2 million limit.
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Last modification: October 28, 2024