BC Wants Basement Units, But Are Its Financial Incentives Enough?

The basement suite as a revenue stream has been a Vancouver region staple for decades, the “mortgage helper” that debt-burdened buyers have long relied upon.

These often dark, low-ceilinged spaces have always had a less-than-stellar reputation in terms of livability, and in some municipalities, are deemed illegal.

That’s about to change.

Next year, the province will legalize basement suites throughout BC. On a mission to deliver rental stock, Premier David Eby announced plans in April to not only legalize all basement and secondary suites, but to incentivize more of them, with loans covering 50% of the cost, up to $40K, for homeowners who renovate to include secondary rental suites. If the suite is below market rate for at minimum of five years, the loan will be forgiven.

It’s expected that at least 3,000 homeowners will benefit from the pilot program for its first three years, according to the Province. The rationale for the program, which is launched in April 2024, is that it will generate affordable housing at a lower cost than “a large-scale, multi-unit housing development.”

It’s part of the Homes for People plan that’s underway and expected to get going by the end of October. The province will introduce legislation to allow up to four units on so-called “single-family” lots, which, in Vancouver, are already mostly zoned forfour units in the form of side-by-side duplexes, each with a basement suite.

Elsewhere in the province, however, the four-unit allowance will have a greater impact. But Vancouver, not one to fall behind, is upping the ante, with plans to introduce a zoning change that would allow up to six units on single-family lots in the city.

As for the $40K forgivable loans, those will likely be popular with homeowners who are burdened by inflation and higher interest rates. But homeowners will be doing the math on offering “below market” rent in exchange for the loan. In Vancouver, the average asking rent for a one-bedroom unit is $2,945, according to the July report for Rentals.ca. That’s a year-over-year increase of 18.1%. The two-bedroom average rent is $3,863, a 14.2% increase.

Rentals.ca data includes basement apartments, condo units, townhouses, semi-detached and detached houses. Their analysis is based on monthly listings for vacant units. It’s different from Canada Mortgage Housing Corporation analysis, and typically higher.

Nobody knows yet how “below market” will be defined, but it’s typically 20% less than market rate as defined by CMHC survey data.

“In the city of Vancouver, as an example, over 50% of their rental stock is in the secondary market, such as basement suites,” says Andy Yan, Director of Simon Fraser University’s City Program. He applauds the new policy, but he wonders if more could be done for renters.

“Does the formalization of the secondary market give you greater affordability and stability? Another way to deal with this is a rental registry, even as a point of data.”

A rental registry, used in other parts of the world, requires landlords to register their properties and ensure they are livable. At the very least, a registry would offer insight into how renters are living, says Yan.

Yan recently released new data that show the vast majority of applications for the addition of secondary suites are on the less expensive east side of the city. Looking at a 6.5-year period, he found 75% of permits issued for construction of a detached house on the west side did not contain secondary suites. Meanwhile, on the east side, more than 75% of all detached homes included a secondary unit.

Yan also said that $40K doesn’t go far these days, and might only cover the cost of a new kitchen.

For first time buyers, a secondary suite can be the difference between qualifying and not qualifying for financing. Rental revenue can typically offset mortgage payments.

“If you have income coming from a secondary unit, whether a laneway house or basement suite, we do factor that into qualification because it’s real money people are receiving and many times in Vancouver and the surrounding areas where real estate is so expensive, it’s one of the ways people have been able to make their homes affordable,” says Ryan McKinley, Senior Mortgage Development Manager at Vancity Savings Credit Union.

He says every financial institution has its own policy, so he can only speak about Vancity. In the Vancouver region, the demand for rental is so high that it’s a reliable source of income for a homeowner. That said, they don’t use 100% of the rental unit as an offset, but 90%, because there will be the occasional month when it is vacant.

“Vancity operates in Vancouver and the surrounding areas, so when we are looking at rents, we’re not making policies for the entire country. We are making policies for our operating area, and where we operate, the vacancy rate is so low it’s reasonable to assume they are going to be able to rent out their units,” he says.

Generally, for every $1K a month of rental income, it increases borrowing power by $125K, says McKinley.

The more rental units, the more borrowing power, such as a secondary suite and a laneway house. The other benefit of a laneway house is that when the couple is ready for retirement, they could opt to live in the smaller house and rent out their main house.

“We have had members that are looking to purchase a house and it might be on the very edge of affordable for them, but what we can do is if there is space to install a basement suite and many times there are, with minor renos, we can factor rent that will be derived from it as well — not only to make it more affordable for them to purchase the home, but also to provide another rental unit in a city that desperately needs more housing,” he says.

But if they tap into the Province’s pilot program, will the $40K be enough incentive to provide below-market housing for that five-year period? Or would the homeowner be financially further ahead by simply charging market rent and footing the cost of a renovation?

McKinley said they need more details, but depending on the discounted rate, they’d likely adjust the qualifying amount according to the rules.

“We want to make sure that people can afford the financing they take on, so [for qualifying] we would use whatever rent they are going to receive, rather than whatever the market rent would be.”