Pros and Cons of Canada’s New Secondary Suite Programs: Loan vs. Refinance Options
The federal government recently introduced two programs to help homeowners add secondary suites like basement apartments or in-law suites to their properties. These initiatives, aimed at easing the housing shortage, make it easier to add valuable rental space while benefiting financially. With options for both low-interest loans and mortgage refinancing, the programs offer choices based on project size and budget.
These programs have significant implications for homeowners in Southern Ontario, especially outside the GTA, where demand for affordable housing continues to rise. Here’s a breakdown of each program and my take on which one might be right for you.
Secondary Suite Loan Program – Ideal for Small Renovations
The Secondary Suite Loan Program (SSLP) provides homeowners with up to $40,000 in low-interest financing to build or renovate a secondary suite. This is particularly suited for modest renovations that require less upfront capital, like converting an existing basement into a rental suite or building a small in-law apartment.
The Pros
Low-Interest Rate: Since the loan comes with low-interest terms, it’s a great way to create rental space without the financial burden of high interest.
Versatility: Perfect for adding rental space or multi-generational living quarters without extensive renovations.
Addressing the Housing Shortage: By encouraging smaller projects, this program is a practical solution for areas with limited space for large-scale developments, making it ideal for Southern Ontario towns where available housing may be tight but space for new builds remains limited.
The Cons
Loan Limitations: With $40,000 as the maximum loan amount, it may fall short for a full renovation. Based on my experience, today’s renovation market often requires around $60,000 to $75,000 to cover a typical basement upgrade. While the loan offers valuable support, you may need additional funds to cover costs.
This loan program is a positive step for adding rental space in Southern Ontario, especially for areas like Haldimand and Norfolk Counties, Oxford, and Brantford/Brant County where rental demand is strong. However, the $40,000 limit could benefit from a higher cap, perhaps $75,000, to better align with today’s costs.
Option 2: Secondary Suite Refinance Program – For Larger Projects
If you’re planning a larger-scale project, the Secondary Suite Refinance Program offers a more robust financing solution. Starting on January 15, 2025, homeowners can refinance up to 90% of their home’s value, capped at $1 million, to fund the construction of secondary suites. With the option for a 30-year amortization, this program is better suited for adding substantial structures, like a coach house or laneway suite.
The Pros
More Financing for Bigger Projects: For homeowners looking to build more than a basic suite, this program’s higher loan ceiling is perfect for ambitious projects.
Longer Amortization Period: By extending payments over 30 years, monthly costs remain manageable even with a larger loan.
Multi-Generational Living: With up to four units allowed, families have the option to add living space for relatives, creating value and flexibility.
The Cons
Higher Loan Amounts Come with Risk: Financing up to 90% of a property’s value, especially with a $1 million cap, can put homeowners at risk if market values dip or if rental demand declines. Taking on such a large debt, especially if your existing equity is low, can limit your flexibility.
Added Costs with CMHC Insurance: Refinancing above 80% LTV requires CMHC mortgage insurance, which adds to your loan balance. For example, at a 4.5% interest rate, a $900,000 refinance can add thousands in monthly payments and insurance fees, potentially raising your total mortgage well beyond $1 million.
This refinance option could appeal to those in Southern Ontario towns where housing demand and prices are rising but not as dramatically as in the GTA. However, the high LTV allowance means homeowners need to think carefully about their long-term financial goals before committing to such a large loan.
Comparing the Programs: Which One Fits Your Needs?
For Modest Renovations: Choose the Secondary Suite Loan Program
If your renovation is small or you’re adding a modest rental unit, the SSLP’s $40,000 loan is a good place to start. It’s ideal for those in Hamilton, Niagara, and Simcoe County, where demand is high, but market costs may still be manageable. However, as renovation costs increase, raising this limit to $75,000 would make a meaningful difference.
For Larger Projects: Consider the Secondary Suite Refinance Program
For projects like a coach house or laneway home, refinancing up to 90% of your home’s value may provide the capital you need. Just remember, even though this option allows for larger projects, carrying a high loan-to-value (LTV) ratio can restrict your equity and financial flexibility. If you’re taking on this route, a minimum of 20%–35% equity is recommended to provide a buffer in case of market fluctuations.
Things to Consider Before You Refinance
With both programs designed to address Canada’s housing shortage, the Secondary Suite Refinance Program offers more funds but comes with added financial obligations. For example, if you refinance to the maximum and later need to sell, the high LTV could eat into your remaining equity after covering costs like commissions, legal fees, and potential prepayment penalties. This is an especially important consideration in Southern Ontario, where home prices tend to be more stable than the GTA but can still fluctuate.
The Bottom Line: Balancing Benefits with Financial Responsibility
Both the Secondary Suite Loan Program and Secondary Suite Refinance Program provide valuable options for homeowners looking to add secondary suites, create rental income, or support multi-generational living. Here’s my take:
For modest renovations: The SSLP is a good start, though increasing the loan limit to $75,000 would make it more realistic in today’s market.
For larger projects: The refinance option works well if you’re financially prepared and have at least 20% equity in your property. But refinancing at such a high LTV could be risky if you plan to sell in the near future.
By carefully weighing these options and considering your financial goals, you can choose the program that best supports your needs while building value in your property. Both programs aim to increase rental housing supply, but with any financing decision, it’s essential to proceed with caution.
If you’re considering a secondary suite project or want to explore how these options could fit into your plans, reach out today! I’m here to help you understand your options and connect you with trusted partners to get started.
Your Friend in the Mortgage Business,
Adam Walker
Owner, Mortgage Agent
Walker Mortgages
226-567-4274 ext. 1
[email protected]
