New Hampshire Mutual Bancorp’s three banks – Merrimack County Savings Bank, Meredith Village Savings Bank and the Savings Bank of Walpole – are the latest institutions to develop new accessory dwelling unit loan products for their Granite State customers.

NHMB’s banks started offering construction loans last month specifically aimed at homeowners who want to build small attached or detached ADUs, also known as a granny flats or in-law units, on their properties.

But there’s a twist to the new ADU construction loans that’s designed to make them more attractive to homeowners who don’t want to give up their current primary mortgages with super-low interest rates that they obtained years ago.

Traditionally, construction loans and primary mortgages are rolled into a new first-lien mortgage product set at market rates.

NHMB’s ADU construction loans, however, will be considered separate second-lien (also known as second-position) loans that will allow customers to keep their original, lower-rate mortgages in the first position.

The separate ADU products will be fixed-rate loans staring at 7.875 percent.

Jaime Frederes, senior vice president and a residential lending officer at NHMB, said bank executives decided to offer its new “second-lien ADU mortgage solution” after talking to numerous customers looking for ways to finance an ADU addition without losing terms of their original mortgages.

Many of those original mortgages have rates of 4 percent or lower, obtained before the Federal Reserve started raising its benchmark short-term rate in late 2022 and 2023.

“People are just reluctant to give up those lower mortgage rates,” said Frederes. “By offering these ADU construction loans in the second position, it allows people to maintain their affordable first-position mortgage loans.”

New Push to Unlock ADUs Statewide

NHMB’s move comes amid a growing push by housing advocates, state policymakers and homebuilders to spur construct of new single-family, multifamily and other residential units across the state, amid a widely acknowledged housing shortage.

ADUs, which can range in size from 400 square feet to 1,000 square feet, are considered a relatively small but innovate way to help address the overall housing crisis in New Hampshire, officials say.

In 2017, the state passed a law requiring towns to allow homeowners to construct ADU additions attached to their houses.

This spring, the state Senate is debating a House of Representatives-passed bill that would expand upon that 2017 law, permitting homeowners to build either attached or detached ADUs “by right” on their properties.

If passed, HB577 is expected to spur construction of additional new ADUs across the state, perhaps thousands of them.

Low Mortgage Rates a Deterrent, Too

But a major market challenge facing ADUs, besides sometimes fierce opposition to them in many towns, is financing ADUs, which can range in price from $100,000 to $300,000, depending on their size and various amenities.

Specifically, homeowners are reluctant, as Frederes notes, to proceed with an ADU project if it entails taking out a construction loan that would effectively wipe out their low-interest primary mortgage.

Ryan Pope, a former banker now working at the state housing financing authority New Hampshire Housing, said such financial challenges is one of the reasons why he helped develop and pitch a new loan product to boost production of ADUs.

The idea he came up with is very similar to what NHMB has developed on its own: a second-position ADU construction loan that allows people to keep their primary home mortgage at lower rates.

In recent years, Lighthouse Credit Union, Kennebunk Savings Bank, First Seacoast Bank and Service Credit Union have all adopted variations of the second-position ADU loan product, said Pope.

“It’s been exciting to see these banks and credit unions doing this,” said Pope.

And now NHMB’s banks – all three of which are among the state’s top 10 largest locally-based banks – are offering their own version of an ADU loan.

“I think it’s awesome,” Pope said.

A Lead Pipeline for HELOCs

But are customers rushing to local banks and credit unions to take out ADU loans?

At First Seacoast, the answer is no – and yes.

Jean Tremblay, senior vice president and senior retail banking officer at the Dover-based First Seacoast, said his bank has issued no – as in zero – ADU construction loans since it started offering them in 2023.

But the mere existence of ADU-specific loans has attracted customers to the bank inquiring about how to finance ADU construction projects, he said.

More often than not, homeowners who talk with bank officials discover that they’d be better off taking out a home equity line of credit (HELOC), rather than an ADU construction loan, Tremblay said.

The reason: many homeowners today have lived in their houses long enough to build up huge amounts of home equity that they can easily borrow against via a HELOC.

To some, a disadvantage of a HELOC is that they have adjustable, not fixed, interest rates.

But a big advantage of HELOCs is that there’s no timetable when they must be used – and thus people don’t have to start making interest payments on HELOCs until they actually start spending money.

Will Demand Grow?

Tremblay said his bank doesn’t keep track of what exactly HELOCs are used for by customers, but he estimated that “at least” 20 or more of his bank’s HELOC deals have been used to build ADUs in the Seacoast area.

He said he envisions second-position ADU loan products to eventually become more popular when, or if, the housing market cools down a bit and more inventory comes on the market.

In addition, there’s only a limited amount of land on which to build residential housing in some parts of New Hampshire – and ADUs will probably become a popular option as the land crunch grows more severe, said Tremblay.

Nick Taylor, executive director of Housing Action New Hampshire, said he has little doubt that ADU-geared loans will become more popular as time passes, particularly if NH lawmakers make it easier to build ADUs.

“Most people don’t have $100,000 or $200,000 in liquid cash to build ADUs,” he said. “They need financing. These new loans are going to help. It’s all a new market. What’s nice is that you have all these banks coming up with solutions. The more entities that offer loan [options], the more it will make a difference.”