Garden Suite or Basement Apartment? How the Financing Differs in Ontario

Same goal, two different projects

A basement apartment and a garden suite both end in the same place: a second, self-contained home on your property, for a family member or for a tenant. Getting there is a different job in each case, and the financing follows the job.

Ontario's own homeowner guide describes a second unit as a self-contained dwelling with its own kitchen, bathroom and sleeping area, located in your house or elsewhere on your property, such as above a laneway garage or in a coach house. Both projects meet that definition. What differs is how much has to be built to get there.

A basement apartment usually works inside a structure that already exists. The walls, roof and foundation are there, and the work is about ceiling height, egress windows, fire separation, a separate entrance, plumbing and a kitchen. A garden suite is a new building. It needs a foundation, its own framing and roof, and water, sewer and electrical service run out to it from the main house or the street.

What changes on the financing side

For a smaller basement conversion, especially on a home you are buying, the renovation can sometimes be added to the purchase mortgage through Purchase Plus Improvements, with the money released once the work is done. On a home you already own, a refinance or a line of credit can cover a modest project out of existing equity.

Those routes run out of road on bigger projects. They are sized on what the property is worth today, so the new unit adds nothing to what you can borrow until it exists. A garden suite, or a basement conversion that turns a house into a duplex or triplex, usually needs financing that looks at the finished property instead.

That is what a construction mortgage based on the as-complete value does. The Blueprint Build Plan lends up to 80% of what an approved appraiser says the property will be worth once the work is finished, on a purchase or a refinance, for up to four residential units. The build money is paid to you in stages as the work is inspected, and you pay interest only while the work is under way.

• Basement apartment: often a smaller budget, a shorter build, and sometimes a fit for Purchase Plus Improvements or a refinance.
• Garden suite: a larger budget, a foundation and servicing, a longer build, and almost always a construction draw structure.
• Either one: the lender will want drawings, an itemised contractor quote and a realistic timeline before it approves anything.

What your city actually allows

The provincial rules have opened the door, and several cities have gone further. The City of Kitchener says you may be able to build up to four dwelling units on lots that currently permit a single detached, semi-detached or street townhouse dwelling, whether inside the existing building, as an addition, or as a separate detached structure.

The City of London permits a maximum of three additional residential units per lot, two of which can be in a detached building, and it says no additional parking is required for them. London also notes that certain ARU zoning rules are temporarily superseded by an interim control by-law, which adds restrictions while it is in effect. That is a good example of why the city's own zoning desk is the first call, not the last.

Both cities send you to the same place before anything else: your zoning, your lot, and the setbacks, lot coverage and driveway rules that apply to it. A garden suite that works on a deep lot in one neighbourhood may not fit on a narrow lot two streets over.

The costs that are not construction

Kitchener's guide lists the costs homeowners tend to forget: consultant fees such as a designer or surveyor, utility connection fees, building permits, a zoning certificate, a driveway permit, and development charges. It also notes that a designer or architect is required if you are proposing three or more units in a building.

Ontario's guide adds one piece of good news for the basement route: for the construction of a second unit in an existing house, development charges are not collected. A detached unit can be treated differently, so ask your municipality what applies to your project before you price it.

How the money moves on either project

With the Blueprint Build Plan, the steps are the same whichever unit you are building. Plans and a quote go to an approved appraiser, who values the property as finished. At closing, your existing mortgage is paid out or your purchase closes. Draws are then paid to you as an inspector confirms the percentage of work completed, less a 15% holdback that the lender releases at the final inspection. Once the work is done, the mortgage converts to a regular one.

Two practical points follow from that. You carry the 15% holdback yourself until completion, so it has to be available from savings, a gift or borrowed funds. And the interest-only payments during the build sit on a short term that usually costs more, so they are not the bargain they sound like near the end of a long build.

Which one makes sense for you

There is no general answer, but the same few questions settle it most of the time. Does the basement already have the ceiling height and a practical route for a separate entrance? Is there rear-yard access for a garden suite, and can services reach it? Is the unit for a parent who needs step-free access, or for a tenant? And how long do you plan to own the property?

If the unit will be rented, treat the rent as an estimate. Vacancy, tax on rental income, insurance and upkeep all come off it. How much of that rent a lender will count toward qualifying is its own question, covered in our piece on secondary suite income and mortgage qualifying.