As housing demand rises and space for new development shrinks, laneway housing has emerged as a practical way to add gentle density in existing urban neighborhoods. Built on lots that back onto laneways, these compact secondary suites typically cost between $350,000 and $550,000 and can generate rental income—whether at market or affordable rates.
But while the concept is simple, financing often isn’t. Laneway suites sit at the crossroads of infill development, small-scale construction, and unconventional design—making them a tough fit for traditional lending models. For nonprofits, small-to-medium sized developers, and businesses, securing the right financing is often the hardest—and most important—part of making the project work.
This guide breaks down the financing options available, how they work, and when they make the most sense.
1. Home Equity Line of Credit (HELOC)
While they are technically a personal banking product and not designed for commercial-scale development, HELOCs are occasionally used by small business owners or developers with properties held through a simple holding company. They can provide early-stage capital for soft costs, permitting, or interim expenses ahead of construction financing. This approach works best when there’s substantial equity and low overall debt. Since HELOCs are tied to personal assets and charge variable rates, they carry risk and are best used cautiously—as part of a broader financing plan rather than a stand-alone solution.
2. Construction Loans
Construction loans are often the most practical financing tool for laneway housing when there’s a clear plan, permits in place, and a qualified builder with a defined budget. Funds are typically disbursed in stages, helping manage cash flow throughout the build. For nonprofit housing providers or developers, these loans work best when early soft costs are already covered through predevelopment capital or grant funding.
While traditional lenders may hesitate to support unconventional builds like laneway homes, credit unions and impact-driven lenders often bring a better understanding of small-scale infill housing. VCIB, for example, underwrites properties based on total unit count—regardless of whether units are in one building or split between a main home and a laneway suite. This approach treats laneway housing as part of the overall residential density, making construction financing more accessible for small-scale development.
3. Take-Out Financing
Once construction is complete, most laneway housing projects are refinanced into longer-term financing through a mortgage. This shift improves affordability and cash flow stability, particularly for organizations planning to hold and rent out the unit over time.
For nonprofit housing providers or mission-driven developers offering below-market rents, CMHC-insured mortgages can be an effective option. Backed by the Canada Mortgage and Housing Corporation, these mortgages often come with lower interest rates and extended amortization periods. In exchange, borrowers must meet specific eligibility criteria and adhere to CMHC’s affordability requirements, including rent thresholds and income limits.
4. Government Grants and Incentives
Government-backed programs like the Canada Secondary Suite Loan Program, which is set to launch in 2025, or municipal development charge deferral programs like Toronto’s, can reduce capital costs—especially for affordability-focused builds. However, they often come with administrative overhead, specific eligibility criteria, and longer approval timelines. Most grants and subsidies are not designed to function as core construction financing, so they should be treated as additive—not foundational—sources of capital.
5. Joint Ventures or Partnership Financing
In some cases, organizations can unlock laneway housing opportunities through partnerships. A nonprofit with underused land, for instance, might team up with a small developer who brings the capital and construction expertise. Depending on the situation, these arrangements—whether structured as joint ventures, shared-equity models, or land leases—work well when one party has land but limited capital, and the other has the capacity to build but not site control. For nonprofits, it could be a way to advance affordable housing goals without taking on the full financial and operational burden of a construction project.
***
Building a laneway or garden suite in Toronto is within reach—but it starts with the right financing. VCIB works with nonprofits, developers, and businesses to structure capital that supports long-term impact. If interested in chatting with VCIB about your financing needs, get in touch.
