Councillors have agreed that £254,000 from the Strategic Housing Fund should be allocated to build five affordable houses at Port Mor on the west of the island.
The project will also involve infrastructure upgrades, including an improved access road to three existing crofts at Port Mor, and will enable Colonsay Community Development Company potential to provide mains water to the crofts.
Planning permission for the development by West Highland Housing Association has been obtained.
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Colonsay has been identified as a priority in both the Council's Local Housing Strategy and the Strategic Housing Investment Plan (SHIP). The island is recognised as a fragile area for a variety of reasons including declining population, lack of economic opportunities and below average income levels.
Around one third of the existing homes on the island are either unavailable or unsuitable for purchase and affordability of housing on the open market is also a significant issue for local residents.
Council Leader Councillor Robin Currie, said: "There is a clear need and demand for housing on Colonsay and it has been a longstanding priority of the Council to improve the availability of affordable homes on the island and to support improvements to the local infrastructure.
"Delivery of this project is in line with our overarching strategy for Argyll and Bute of encouraging repopulation across the region while, at the same time, protecting and supporting our rural and island communities."
