Secondary Suite Financing
Tracy Head • October 18, 2024
Mortgage rule changes seem to be coming at us fast and furious. This isn’t surprising given we are in an election year.
Several weeks ago I wrote about the change to the ceiling for the purchase price of insured homes and the extended amortization that will be available.
On October 8, 2024 the government announced a new program that will come into effect January 15, 2025.
The new program will enable clients who already own their homes to refinance up to 90 per cent of the value of the home to use the available equity to create a secondary suite.
Current rules only allow refinances up to 80 per cent of the value of the home, regardless of the purpose of the refinance.
The parameters of this new program, taken directly from the CMHC website (Mortgage Insurance Rule Changes to Enable Homeowners to Add Secondary Suites - Canada.ca) are as follows:
- This measure will apply to all borrowers seeking to access mortgage insurance in Canada to add more units (secondary suites). These borrowers must satisfy the following requirements:
- Already own their properties;
- The borrower or a close relative are occupying one of the current units;
- Intend to construct additional units; and,
- The additional unit(s) must not be used as a short-term rental.
- Refinancing: Insured refinancing will be allowed for the purpose of building additional unit(s).
- Legal units: The new units must be fully self-contained units (e.g., basement suites with separate entrances, laneway homes) and meet municipal zoning requirements.
- Number of units: Maximum of four dwelling units including the existing unit.
- Maximum Property Value Limit: The “as improved” value of the eligible residential property against which the loan is secured must be less than $2 million.
- Maximum Loan-to-Value limit: Up to 90 per cent of the property value, including the value added by the secondary suite(s), in combination with any other outstanding loans secured by the property.
- Maximum amortization: 30 years.
- Additional financing must not exceed the project costs.
We are still waiting on clarification from lenders as to their specific guidelines around this program so I will provide more information as it becomes available.
With respect to what this means in dollars and cents, using a home valued at $800,000 we will now be able to refinance up to $720,000 for the purpose of adding an additional legal suite. Under previous guidelines we would only be able to refinance up to $640,000 so in this example clients will be able to access $80,000 more of the equity in their home.
It will be interesting to see what the uptake is for this program.
One particular group of clients I see this benefitting is clients who have only been in their home a few years that have seen a moderate growth in their equity after only having put down the minimum down payment when they purchased their home.
With carrying a higher mortgage and the increased cost of living overall these clients may really benefit from access to funds to add a secondary suite to their home.
Not all lenders are created equal Just as no two clients are the same, not all lenders are created equal. For the majority of clients getting the best interest rate is their primary concern. For me as a broker it is as important to find a lender that provides a smooth process from start to finish and excellent customer service once a mortgage has finalized. What do I mean by this? When new lenders pop into the mortgage market they often offer low interest rates or better compensation to encourage mortgage brokers to send files their way. Sometimes these new lenders are amazing, and sometimes not as much. Once in a while more established lenders will offer brilliant rates in order to increase the number of mortgages they have on the go. We see lenders float in and out of the competitive rate market based on how much money they have available to lend at any given time. While this can be great for clients, it can also be a nightmare. If a lender does offer rates much lower than other lenders they end up flooded with applications. They may or may not have the staff / staff with expertise to handle larger volumes and increased time pressures. If we are working on a refinance with flexible dates this isn’t necessarily a problem. If we are working on a purchase application with deadlines this can become stressful for all involved. On top of that lenders have different processes for handling the legal paperwork that goes to your lawyer’s office. Some lenders handle everything in-house and have very responsive teams to handle getting the documents to your lawyer and addressing any changes that need to be made. Other lenders hire third-party service providers to produce their documents and this adds an extra day or two to the process. As a broker I try to learn about my clients’ longer term plans and find the right fit lender-wise. I look at lenders’ policies for portability, pre-payment options, flexibility with respect to their guidelines, broker support, and equally as important client service experience after the mortgage finalizes. Does the lender have a portal? Will they allow me as a broker to help my clients or do they require clients to work with them directly for any changes? We sent applications to two newer lenders over the last month because they had fantastic rate specials available. Both files ended up being very stressful as we were down to the wire waiting for mortgage instructions to be sent to the clients’ respective lawyers. I prefer not to have to deal with last-minute stress on my files. Rate is of course incredibly important to your long-term financial health. In my mind a smooth process before and after your purchase or refinance is also important. There are many considerations that go into choosing the right package for our clients. My recommendation one day may change the next depending on both your situation and what I am seeing behind the scenes with various lenders. I hope you had a beautiful Easter weekend!!
In an ideal situation I have some time upfront to work with clients on their pre-approval. I like to go over what to expect in terms of both the process and what to expect in terms of closing costs when they have an accepted offer on a home. We usually talk about potential expenses like property transfer tax, an appraisal, a home inspection, home insurance, and legal fees. This time of year we also talk about upcoming property taxes for anything they are purchasing before July 1st. I think human nature is that we want to minimize our expenses and make sure we are getting the most bang for our buck. There are a few areas of cross-over where I anticipate the clients’ realtor will be speaking to them about items like the requirement to organize home insurance and the importance of a home inspection. In practice I think most realtors encourage their buyers to move forward with a home inspection because they want to ensure clients are not buying any surprises that will create headaches down the road. Sometimes clients are buying privately and are not represented. In those cases I always urge them to include a home inspection as one of their conditions. I have had clients question the need for a home inspection, particularly if they are buying a condo or a new build. Two recent examples have popped up that reinforce for me the importance of a home inspection: - We are working with a lovely first-time home buyer in the lower mainland. Her budget isn’t huge so she has been waiting and watching for the right property to come up, and for her offer to be the one chosen. The stars aligned for her last week. Her financing was approved and all of the financing conditions were signed off by the lender. We were doing a happy dance for her and had a rude awakening the day she did her home inspection. The home inspector found an ongoing leak in the kitchen that has created a soft wall which is indicative of a bigger problem. On a surface level the kitchen is beautiful and relatively recently updated. As a first-time home buyer with no family nearby our client was thrilled by the aesthetics of this condo, then devastated by the potentially expensive work needed to repair / rectify the damage. - The second situation really caught us by surprise. We have clients on Vancouver Island who have an accepted offer on a brand-new home that has never been lived in. They did choose to invest in a home inspection and we are so glad they did. It turns out that somehow some of the larger windows were installed incorrectly and this has created damage to the windows and a leak in one corner. Again, with a new build the temptation would often be to skip the home inspection. Yes, any issues with this home will be covered by warranty. Having the home inspection done and being aware of the issues upfront gives them a lot more power with respect to having these defects repaired quickly. Now that I’ve driven that point home, its important to know that not all home inspectors are created equal. Do your due diligence – look at reviews, look at the home inspector’s qualifications and length of time / experience doing home inspections. Going with the cheapest option is not always the best option. Buying a home is the biggest investment you will likely make. Trying to save a few hundred dollars upfront may end up costing you thousands of dollars and sleepless nights down the road. Save yourself the pain and aggravation of hidden issues in your home.
