Mortgages For Self-Employed: An Overview

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As we are couple of weeks away from a new calendar year, there is one thing that has clearly changed in the business world. In the words of the famous CEO Gary Vaynerchuk, “Entrepreneurship has been put on such a pedestal, and people are going to suffer from it”. He doesn’t necessarily mean from a financial standpoint (which we will talk about, and has scratched the surface himself), but from a mental one. Many people think it’s become cool to open your own business with little previous experience, but most of these young (or older) people do not have what it takes to financially survive by running a business on their own or with a couple of friends.

Let’s start with some good news about mortgages for the self-employed:

In November last year, the Federal government announced details of its National Housing Strategy, pledging a $40 billion investment over 10 years to assist with the national housing needs of vulnerable sectors, such as homelessness and affordable housing units.
This summer, on July 19, the CMHC announced the implementation of new mortgage lending rules designed to help the self-employed secure mortgages and maintain their position in Canada’s housing market. This has already started to take effect, on the 1st of October.

When mortgages come to mind, it’s always about families or long term couples with a stable income who will be able to pay it off eventually. However, what is never spoken about are the entrepreneurs and their home ownership plans; as we know, being self-employed means your salary can vary on a monthly basis, but being an employee on a payroll is much more stable.

For the longest time, self-employed Canadians have had trouble obtaining loans, primarily due to the variability of their incomes. Since the self-employed are not on a payroll and do not receive a regular income every two weeks, lenders require a more rigorous proof of income, including but not limited to requiring at least two years of proof of income, audited financial statements, a good credit history, regular and stable patterns of income, and a large deposit for the home they are seeking to purchase. At the end of the day, it makes everything more complicated!

One of the biggest obstacles to overcome in securing a mortgage is the very reasonable inclination of a small business owner (and their accountant) to do everything legally possible to reduce taxable income in order to reduce the amount of tax paid by the self-employed. In the case of obtaining a mortgage, the self-employed ideally needs to demonstrate the largest possible income to help to secure a loan. The two purposes are conflicting, with no clear solution. If an entrepreneur is doing very well, it’s a little bit easier, but if not, then what?

The new stress test rules of last year and this year made worse an already difficult situation for self-employed Canadians in the housing market. It severely impacted the general housing market across Canada. And even if a self-employed person was able to qualify for a mortgage, they may be forced into accepting non-competitive interest rates to account for the risk to their lending institution, or turn to other types of lenders, such as credit unions, or private lenders that are not federally regulated.

Back the good news, adding to the earlier info:

The CMHC may introduce several new and more flexible factors that may be used by lenders to assess the mortgage application of a self-employed person. Lending institutions will now be able to include factors such as sufficient cash reserves, the acquisition of an established business, and their training, education, and previous employment experience, including for businesses that have been operating for less than two years. Basically, a strong background into the finances and career of the now self-employed could play in their favour.

The CMHC also suggests the use of supplementation financial documentation when assessing the application for a mortgage. You are welcome to ask me for more info about those!

These changes will greatly assist not only established self-employed Canadians, who according to the CMHC represent 15% of the workforce, but also young entrepreneurs seeking to enter the housing market for the first time. If you are an entrepreneur, new or experienced, the dream of buying a home may soon become a reality!