Home Refinancing for a second suite

Pros and cons of the new federal secondary suite programs

Comparing two federal programs to help Canadians build rental suites: a $40,000 loan or a mortgage refinance option.

Earlier this month, the federal government unveiled the Secondary Suite Refinance Program, set to launch January 15, 2025, which will allow homeowners to refinance up to 90% of their property's value (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, as the program’s goal is to boost rental housing in high-demand areas and help homeowners offset mortgage costs.

Federal loan program better for smaller renovations

That said, I find the Secondary Suite Loan Program (SSLP), introduced as part of the 2024 federal budget in April, much more appealing than the refinance option.

With the $409.6 million program, homeowners can access up to $40,000 in low-interest loans to build or renovate secondary suites like basement apartments.

It’s a great way to make additional rental income or accommodate multi-generational living without breaking the bank.

However, $40,000 is not nearly enough in my view. I personally have had several quotes from contractors in recent months for a basement renovation, and it seems easy to spend $60,000 to $75,000 without doing anything outlandish.

This new loan program is definitely a step toward increasing housing density, making better use of the available space in communities across the country. By allowing homeowners to add secondary suites, 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 move to maximize what we already have, especially in areas where space is at a premium.

Secondary suite refinance program: Ideal for larger projects

If you’re thinking of building something bigger, like a coach house or laneway home, the $40,000 loan won’t go far. That’s where the Secondary Suite Refinance Program comes into play.

Both the CSSLP and the refinance program aim to create more living spaces and help alleviate the housing supply problem. But adding a secondary suite isn’t cheap. Between construction, legal fees, and ensuring everything meets municipal zoning and code requirements, it requires careful budgeting.

This program aligns well with the multi-generational living trend, offering families a way to create living spaces for parents or adult children. But let’s be clear: while it helps add rental options, it’s not a solution to the housing crisis. To truly address that, we need bigger investments in new construction and broader affordability policies.

I do like that additional financing must not exceed the renovation project costs, otherwise things might really get out of hand.

Also, in my view, if you’re looking to take on a project of that scale, you should have a strong financial foundation—meaning at least 20% equity in your home, though I’d even argue for 35%. Having only 10% equity on a $2-million property feels risky and, frankly, irresponsible.

Just because you can borrow that 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’d 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 home later for $2 million. After paying a 5% commission and HST, you’re left with just $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 come with real financial risks if not handled carefully. I am more comfortable the lower the mortgage amount needed. Why announce a new $1.5-million ceiling on insured purchases, and then weeks later announce this refinance program up to $2 million?

The bottom line about the new secondary suite programs

My bottom line: the CSSLP loan limit should be raised to $75,000. In today’s market, it’s nearly impossible to finish a decent-sized basement for under $40,000.

And as for the secondary suite refinance program, I understand some in our community are quite bullish about how it could drive business once details are finalized and lenders and insurers are fully on board.

However, I personally don’t anticipate much demand at all. And I much prefer a cap of $1.5 million, rather than the current $2-million limit.

Source: Canadian Mortgage Trends, Ross Taylor