An Entrepreneur Who Wants A Mortgage – How To Make It Work?

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When we speak of mortgages, it’s always about families with a stable income that will comfortably pay it off after a certain time. What is never spoken about are entrepreneurs and their housing 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.

Earlier 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 will all take effect on the 1st of October this calendar year!

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.

Self-employed Canadians have long faced obstacles to obtaining loans, primarily due to the variability of their incomes. Since the self-employed are not on a payroll, lenders required 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. Complicated, right?

One of the most difficult barriers 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 already difficult situation of self-employed Canadians in their housing market got worse when the new stress test rules got introduced in January this year. 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.

Onto the good news!

In order to address the inequities and difficulties faced by the self-employed, the CMHC has proposed the introduction of several new, 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.

The CMHC also suggests the use of supplementation financial documentation when assessing the application for a mortgage, including reviewing the Notice of Assessment along with a T1 General, CRA Proof of Income Statement, and the T2125 (Statement of Business or Professional Activities) to account for the gross income of the self-employed, pre-taxable deductions.

These changes will greatly assist not only established self-employed Canadians, who according to the CMHC represent 15 per cent of the workforce, but also young entrepreneurs seeking to enter the housing market for the first time. Buying a home may now be an achievable goal for this long overlooked community.