A laneway house is a detached home built on the same lot as an existing house and facing a laneway, usually in the backyard. A laneway, also known as an alley or alleyway, provides access to garages and parking away from the main street. By building a laneway house in this space, homeowners can take advantage of this unused land and create a separate house that can serve as a rental property or additional living space for family members.

Laneway houses are typically small in size, ranging from 500 to 1,000 square feet. Most laneway houses are two storeys. Sometimes, they’re built above an enclosed garage, or they might provide cover for partially enclosed parking. Laneway houses are also considered to be infill housing since they involve building new homes on existing lots in already-established neighbourhoods.

Laneway houses offer the biggest benefit in cities where housing affordability is a major issue. With rising house prices and limited space, laneway houses increase the supply of affordable housing in urban areas. For homeowners, some of the benefits of laneway houses include:

Additional Rental Income: Building a laneway house allows owners to generate additional rental income by renting out the unit to tenants.

Multigenerational Living: Laneway houses provide a solution for multigenerational households, allowing families to live together while maintaining privacy and independence.

Increased Property Value: Adding a laneway house can increase the property's overall value, making it an investment opportunity for homeowners seeking long-term gains.

Benefits of laneway houses for the greater community include:

Affordable Housing: With Canadian housing prices at unaffordable levels, laneway houses are a more affordable option in urban areas. It also increases housing options for renters, especially in high-demand or expensive areas.

Urban Densification: As cities become increasingly crowded, laneway houses provide a way to gently increase housing density without sacrificing new land by adding density to existing residential areas. It’s one part of filling in the “Missing Middle” between single-family homes on large lots and high-rise condo apartments.

While there are many benefits to building a laneway house, there are also some challenges that homeowners should be aware of:

Cost: Building a laneway house can be expensive, with average costs ranging from $200,000 to $400,000.

Zoning Regulations: Not all cities and neighbourhoods allow the construction of laneway houses. For cities that do, getting a building permit takes time, and there might be restrictions on the size of the laneway house. Homeowners must research the zoning regulations in their area.

Design Limitations: Due to the small size that a laneway house would fit in, there may be design limitations and restrictions on what features can be included in the house. For example, there may not be enough space for a full-sized kitchen or multiple bedrooms. This can limit the overall functionality and potential rental income of the laneway house.

A laneway house would cost between $200,000 and $400,000 to build, although the cost would vary depending on factors such as location, labour costs, size, materials, and furnishings. According to HGTV Canada, constructing a laneway house in Canada costs approximately $350 to $500 per square foot.

A 2018 study by the City of Vancouver found that most laneway houses in Vancouver cost under $300,000 and less than 1.5 years to build. It also found that building a laneway house at the same time as a new main house could save $100,000 in construction costs compared to building a laneway house with an existing house. That's why 90% of all laneway houses in Vancouver are built at the same time as the new main house. In fact, almost half of all new houses in Vancouver are built with a laneway house!

Municipalities have bylaws that may require certain rules, such as setbacks and separation from the main house, as well as access from the public street. Setbacks refer to the minimum distance that the laneway house must maintain from property lines, and they are meant so that adequate space is preserved for privacy and to prevent shadows. They’re also in place to allow for enough manoeuvring space for cars in the laneway, and even to allow space for storing snow. Meanwhile, separation distance is the required spacing between the laneway house and the main house on the same lot. Separations are imposed for multiple reasons, such as maintaining the openness and sunlight of a lot or even ensuring that fire cannot travel between the main house and the laneway house.

Laneway Houses in Toronto

Toronto legalized laneway houses in 2018 with specific regulations for setbacks, height, and lot coverage, covered in City of Toronto Zoning By-law 569-2013, Chapter 150.8 for Laneway Suites. Some key points of laneway house regulations in Toronto include:

• Toronto allows for either one laneway house or a garden suite occupied as a principal residence on a lot, but not both on the same lot.
• The lot must have at least 3.5 meters of frontage abutting a public lane on the rear or side of the lot.
• If the laneway house's height is less than or equal to 4.0 meters, there must be a minimum separation distance of 5.0 meters between any existing buildings on the lot, or a minimum separation of 7.5 meters if the height is over 4 meters.
• The maximum laneway house length allowed is 10 metres, and the maximum laneway house width allowed is 8 metres.
• Laneway houses can have a maximum of two storeys, with a maximum height of 6.3 meters.
• The interior floor area of the laneway house must be less than the floor area of the main house on the lot.
• Laneway houses are not permitted to cover more than 30% of the lot area.
• Laneway houses are required to have at least two bicycle parking spaces in Toronto, although there is no requirement for cars.

Laneway Houses in Vancouver

Zoning and Development By-law No. 3575 covers the regulations for laneway houses in Vancouver. Here are some things to note from this by-law:

• The lot must have a width of at least 9.8 metres.
• Laneway houses can have one storey or one storey and a partial second storey.
• One-storey laneway houses cannot have flat roofs over 4.3 metres high or gable or hip roofs over 5.2 metres high, and the home cannot extend more than 26% into the lot depth.
• Laneway houses with a partial second storey cannot be higher than 6.7 meters and cannot reach more than 21% of the lot depth.
• The laneway house must be within 0.9 to 7.9 metres from the lot rear and at least 4.9 metres from the main house on the lot.
• For emergency access, such as firefighters, a solid path of at least 0.9 metres wide is required from the street to the entrance of the laneway house.
• Must have at least one bedroom with a minimum size of 90 square feet, and a habitable room that is not a bedroom that is at least 180 square feet.
• The maximum floor area is 25% of the lot area, up to 2,000 square feet. This includes the area of any basements, stairways, garages, or covered parking spaces.

Laneway Houses in Calgary

Referred to as a type of backyard suite in Calgary, the Calgary Land Use Bylaw 1P2007 sets out rules for them. This includes:

• Minimum setback from the rear property line: 1.5 metres
• Setback from a street or lane can be reduced to 0.6 metres for any portion used as a private garage
• Minimum setback from a side property line: 1.2 metres
• Must be at least 5.0 metres away from the main residential building
• Maximum building height: 7.5 metres
• Maximum floor area: 807 square feet (excluding stairs and landings of not more than 27 square feet)
• Required private outdoor amenity space: at least 80 square feet (except in the R-CG District)

Homeowners can use personal savings, construction loans, or lines of credit to fund their laneway house. However, some lenders offer loans specifically for laneway house construction with flexible terms and conditions.

Equitable Bank Laneway House Mortgage

Equitable Bank’s laneway house mortgage is available in the Greater Toronto Area (GTA), Greater Vancouver Area, and Calgary. When calculating debt service ratios, Equitable will consider the estimated rental income for the laneway house, helping to make it easier to qualify. It’s available for laneway houses that will be owner-occupied or for rental or investment purposes.

It has a 1-year open term to finance the construction of a laneway house or garden suite. The maximum loan-to-value (LTV) is 75% of the completed value or 80% of the budget. Borrowers will need to provide proof of funds for at least 25% of the budgeted construction costs.

This laneway house mortgage only requires interest-only payments during the term. Since it is open, there are no prepayment penalties. After the 1-year term, the borrower will need to switch to an amortizing mortgage. Draws are made at 20%, 40%, 70%, 80%, and 97% completion, with a 10% construction lien holdback on each draw until 45 days after completion. There’s a $250 fee for each advance and $175 for each property inspection.

Equitable Bank requires a minimum credit score of 680 and a minimum loan size of $200,000. Rates start at Prime + 2%, and there is a 1.5% commitment fee. The property must also be free and clear without a mortgage, or with an Equitable Bank mortgage in first position.

Vancity Laneway House Mortgage

Vancity, a credit union in British Columbia, offers a laneway house mortgage for those looking to purchase or build a laneway house in the province. Vancity’s Laneway Homebuyers’ Bundle offers up to $750 to cover closing costs and home appraisals and the possibility to get up to 1% cash back on the mortgage when you transfer an existing mortgage to Vancity.

Incentives for Laneway Houses

Some cities offer incentives for laneway houses:

• Toronto's Laneway and Garden Suite Development Charges Deferral Program defers development charges for up to 20 years.
• British Columbia's Secondary Suite Incentive Program (SSIP) provides a forgivable loan of up to 50% of the cost, up to $40,000. The loan doesn't need to be repaid if the laneway house is rented out at below-market rent rates, as defined by BC Housing for your area, for at least five years.
• Calgary is waiving development permit and registration fees for laneway houses and other secondary suites until December 2026.
• Halifax's Secondary and Backyard Suite Incentive Program provides a forgivable 5-year term loan of up to 50% of project costs to a maximum of $40,000. This funding can cover costs such as labour, materials, and design fees.
• The Saskatchewan Secondary Suite Incentive (SSI) grant program provides a grant for 35% of the cost of constructing a new laneway house, up to $35,000. Only up to $5,000 can be used towards appliances such as stoves, refrigerators, and dishwashers.

How Common Are Laneway Houses in Canada?

Laneway houses aren’t common, even in cities like Vancouver and Toronto where space is at a premium and home prices are skyrocketing. There are less than 200 laneway houses in Toronto as of 2024, according to Global News, even though the City of Toronto legalized laneway houses in 2018.

Laneway houses are more popular in Vancouver, which started allowing laneway houses to be built in 2009. There are currently over 6,000 laneway houses in Vancouver as of 2024, according to the magazine BCBusiness, and the City of Vancouver has targeted to have 4,000 more laneway houses built over the next ten years by 2034 in its Housing Vancouver 10-Year Targets. According to The Globe and Mail, properties with a laneway house make up 4% of all home sales in Vancouver.

In Calgary, there are just under 200 backyard suites in the city as of 2024, according to the City of Calgary. This includes laneway houses, carriage houses, and garden suites. The Calgary Real Estate Board (CREB) had estimated the average cost of constructing a laneway house in Calgary to be $250,000 to $300,000.

On the other hand, laneway houses are increasingly popular in the United States, where they are called accessory dwelling units (ADUs). In California, 20% of new homes constructed in 2023 were ADUs, according to Yahoo Finance. A big driver of that is the US$900,000 median home price in the state in 2023, but also through large lot sizes that easily accommodate ADUs, and government actions such as reducing permit approval times to 60 days, removing size or parking requirements, and allowing ADUs to be built without living on the property. Even though ADUs are prevalent in major cities like Los Angeles, San Francisco, and San Diego, their asking rents aren't exactly affordable either, where ADU rents can command $4,500 per month. The main driver for building ADUs is multi-generational living, as the cost of building a laneway home is far lower than buying a regular detached home.