An Accessory Dwelling Unit (ADU) is a small, self-contained residential unit built on an existing property. ADUs can take various forms, such as a detached backyard cottage, a basement suite, or a garage conversion. They include a sleeping space, kitchen, bathroom, and must have a dedicated entrance. While typically built on-site, ADUs can also be prefabricated. The primary value of an ADU is in adding housing capacity without requiring the purchase of additional land.
In a previous post in December, we explored how ADUs are a crucial solution to Canada’s housing crisis. However, several challenges need to be addressed, including the need for flexible funding programs. Recently, RBC announced new financing options to help homeowners add ADUs or redevelop their single-family homes into duplexes, triplexes, or multiplexes, depending on municipal zoning. This is a positive step toward supporting “missing middle” housing and enabling homeowners to generate supplemental rental income.
These new financing options align with the Canada Secondary Suite Loan Program, which offers homeowners up to $40,000 in low-interest loans to build secondary suites. The key question is whether these programs will be sufficient to motivate homeowners to build enough ADUs to make a significant impact on the housing market.
In the US, Fannie Mae has adapted its guidelines to accommodate ADUs, making them eligible for renovation loans, refinancing loans, home equity loans, home equity lines of credit, and construction-to-permanent financing for single-unit properties with ADUs.
There is an opportunity for the Canada Mortgage and Housing Corporation (CMHC) to expand its insurance and securitization programs to support the financing of ADUs as well. Funding an ADU is challenging because it begins as a construction loan that must later be converted into a mortgage on personal property.
CMHC could modify its chattel mortgage loan program to accommodate this type of lending. Since ADUs are smaller units with no land value, they should qualify for mortgage insurance. Similar to a purchase-plus-improvement loan, the lender would be responsible for managing the construction draws. To avoid conflicts between the lender of the existing home and the lender of the ADU in case of default on either mortgage, it would be beneficial for the same party to handle both loans, at least in the initial stages of the program.
Creating this structure offers a significant advantage. Once CMHC establishes an insured loan for the ADU under construction, they could introduce a new pool of National Housing Act Mortgage-Backed Securities (NHA MBS). This would enable lenders to bundle and sell these loans as securities. These NHA MBS would have a unique feature where only interest accrues on the principal initially. Including these loans in the $20 billion Canada Mortgage Bond (CMB) increased issuance limit (for CMHC’s rental construction financing initiative, the Apartment Construction Loan Program) would encourage these activities, and they would fit well as replacement assets because of the short-term nature of the mortgages involved. In the final funding stage, these loans would roll into regular insured mortgages, again falling under the increased $20 billion CMB program limit.
In summary, Accessory Dwelling Units (ADUs) represent a promising solution to Canada’s housing crisis by efficiently expanding housing capacity without the need for additional land. While challenges like funding flexibility persist, recent initiatives by institutions like RBC and adaptations by entities such as Fannie Mae in the US indicate a growing recognition of ADUs’ potential. These developments position ADUs as a pivotal component of future housing strategies, highlighting the ongoing evolution and innovation needed in Canada’s dynamic housing landscape.
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.
