How Government Financial Support Can Boost ADU Development

Accessory, or Additional, Dwelling Units (ADUs) have emerged as a great solution to the housing crisis in many regions of Canada. These self-contained living spaces, maybe referred to as granny flats or in-law suites in your town, are built on the same property as a primary residence, usually in a back or side yard. Despite ADU’s potential, homeowners sometimes fear costs associated with building ADUs; however, newer efforts of financial support from the government could increase the number of ADUs built, releasing strain from the current housing market, providing attainable housing options and increasing housing supply.

Current Perceived Financial Barriers

As with most things regarding home financing, the primary obstacle for many homeowners is the cost of constructing an ADU. On average, the construction of a detached ADU can exceed the available financeable equity for many property owners, with a typical financing gap of $69,849 (2, 3)​​​​. This means that many homeowners are unable to secure necessary loans to start their projects, which hinder their ability to increase their property’s value and potential to general rental income. This gap often prevents homeowners from accessing the necessary loans to start their projects.

Government Financial Support

In order to incentivize ADU developments, governments at every level (municipal, provincial, and federal) are introducing various financial incentives to bridge this gap. This financial support can bridge these gaps in several ways:

1. Low-Interest Loans: By offering low-interest loans specifically for ADU construction, the government can make it more affordable for homeowners to finance these projects. For example, the federal government announced a loan program offering up to $40,000 per ADU (see April 2024 Budget announcement). While there aren’t many details yet, we estimate this will help 40% of homeowners with lots suitable for ADU development now be able to afford these detached units.

2. Tax Credits: Expanding the scope of tax credits, such as the Multigenerational Home Renovation Tax Credit (MHRTC), could provide direct financial relief to those that qualify and are currently renovating their homes to include ADUs. The current credit is calculated by multiplying the lowest personal income tax rate (15%) by up to $50,000 of qualifying expenditures.

3. Grants and Subsidies: Direct grants or subsidies could cover a portion of the construction costs, making it feasible for homeowners with limited savings to build ADUs. Some municipalities are making these strides with Hamilton, Ontario offering a building permit rebate program and most recent news from St. Catharines, Ontario, who is now offering up to an $80,000 grant for qualifying properties.

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Impact on Housing Affordability

In the past, our team analyzed 1.5 million lots in over 175 municipalities in Canada to figure out how many properties were suitable for backyard homes. During that process, we also looked at affordability, asking the question: Could the average homeowner afford the additional carrying costs of adding a standard one bedroom detached ADU? From this analysis, we discovered that nearly 450,000 households both had a single family home on a lot that was suitable for a backyard home, and they could afford it. From there we applied the $40,000 financial incentive (as proposed by the federal government to see how many more lots would be both suitable and could afford the additional costs of an ADU.  

By reducing the financial barriers to ADU construction, government support could increase the number of ADUs built. Currently, we estimate that there are nearly 1,500,000 units that are suitable to qualify for an ADU in Canada. However, only 450,000, or 30%, of these are considered suitable and affordable, meaning the average household can afford the additional monthly mortgage costs or go over 42% of their gross monthly income. 

If there is a standard subsidy of $40,000 by the government, this can bring the total number of ADU suitable and affordable lots up to 1,200,000 or 80%. Across Canada, the addition of this subsidy can help us increase the number of ADUs across Canada by almost 750,000 or 266%!

Percentage Increase of Homes that are both Suitable & Affordable with Grant

The provided subsidy can also offset the ongoing expenses or carrying costs that are usually associated with creating and operating a house or an ADU, including mortgage interest, property taxes, insurance, utilities, maintenance, and potential association fees. For example, as a part of their effort to stimulate the construction of ADUs, Hamilton’s building permit rebate program that aims to assist in offsetting some carrying costs through financial incentive programs that include rebates and forgivable loans for permit fees up to $2,000. 

Potential Total of Additional ADUs Across Canada

St. Catharines Community Improvement Plans

An example of what this program can look like can be seen in St. Catharines which has taken a big step forward in their Community Improvement Plans to enhance housing diversity and increase the availability of affordable rental housing within the city. They have created an ADU program that when applied for within 30 days of receiving a building permit offers a one-time grant to those building either a detached or an attached unit. This grant does not cover decorative amenities or appliances but it does cover important costs associated with building materials, labor and any necessary utility upgrades such as heating + cooling systems (HVAC) and plumbing. 

Overall, St. Catharines ADU builders can receive a grant of up to 70% of the eligible project costs with a maximum cap of $80,000 upon project completion. The program also encourages the homeowner to explore additional financial incentives from other agencies which can further supplement the ADU grant. Of course, some qualifications will apply to the homeowner such as being current on all property taxes, the completion of necessary inspections, and providing full documentation of the project costs. Once this is all covered, the grant will be offered.

Conclusion

While the potential for ADU development is significant, perceived financial strain still exists. Government backed efforts, such as low-interest loans, expanded tax credits, grants and other direct subsidies, can play an important role in unlocking ADU affordability potential and addressing the housing crisis. By reducing financial barriers, these measures can encourage more homeowners to consider building ADUs, leading to a substantial increase in affordable housing options. For those interested in exploring the financial feasibility of building their very own ADU,  check out our Financial Calculator Tool aimed to help estimate potential costs and benefits of building an ADU. 

Resources

ADU Search Data / (2) ADU Potential in CA / (3) Financial Modeling / (4) Data to Reference / (5) Multigenerational Home Renovation Tax Credit / (6) St Catharines / (7) Canada.gov MHRTC