To achieve the federal government’s housing targets, a major increase in housing construction is essential. Since most projects take up to seven years to complete, progress has been slow, leaving the government struggling to show any measurable signs of progress on increasing the housing stock.
One of the goals of the Housing Accelerator Fund (HAF) was to make it easier to develop missing-middle housing. This involved encouraging cities to support “light” densification in existing neighborhoods. Many cities had already been promoting laneway housing and basement suites in select neighborhoods, but by signing on to the HAF, they committed to supporting this kind of development more broadly across the urban landscape.
On October 8, the government announced new measures to encourage the construction of secondary suites. Starting January 15, 2025, homeowners will be able to refinance up to 90 per cent of their home’s value, including the added value from the secondary suite. This mortgage will be eligible for a 30-year amortization period. Additionally, for those building an eligible structure (1-4 units), the mortgage insurance limit has been increased to $2 million.
The requirements for this funding are:
- The borrower must already own the property.
- The borrower or a close relative must occupy one of the existing units.
- It must be a legal, conforming unit.
- The additional units cannot be used as short-term rentals.
This may sound simple; however, I anticipate challenges in implementing this program. The advice from the Department of Finance to insurers and lenders was vague regarding several key questions:
- What constitutes the loan amount – Is it the value of the existing home plus the planned or the actual development expense?
- Is the loan-to-value (LTV) ratio based on the completed value or the budget, and is it subject to any adjustments?
- Does the lender need to register a collateral charge for the full mortgage amount and advance funds as needed?
- How will the lender monitor the construction of the secondary suite for any progress advances? The lender will likely require progress reports from the original appraiser, property inspections at their discretion, and a statutory declaration from the borrower regarding the costs paid.
- What is the amount of the construction holdback, and when will it be released?
- What construction documents need to be provided?
- Are self-builds permitted?
- How much borrower equity is required?
- Will builder all-risk insurance be required?
- Will the lender charge a fee for each advance and property inspection?
- Who bears the completion risk? Is it the borrower’s, the lender’s, or the insurer’s responsibility? How this is managed will determine mortgage and insurance premium pricing as well as the overall program design.
- When will these mortgages be eligible for securitization?
Adding to this complexity is the question of whether the Income Tax Act’s deemed disposition rules will apply. The creation of a bedroom suite or laneway home could trigger the “change of use” rules, resulting in a deemed disposition for tax purposes. The CRA has specific conditions that must be met to avoid triggering these rules. Another major tax issue is whether the homeowner will be eligible for the GST/HST rebate on the construction inputs. Navigating this will require extensive upfront planning and documentation.
Even if homeowners overcome these hurdles, they may still face development restrictions. Some communities have implemented restrictive covenants to block blanket zoning for increased housing density.
In short, don’t expect this product to lead to a sudden jump in bedroom suites and laneway homes.
Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.
