The Canada Mortgage and Housing Corporation is making it easier for self-employed Canadians to apply and qualify for mortgages.
According to CMHC, 15% of the country’s population is self-employed, and at the moment, it is difficult for them to apply for mortgages, especially if their business is less than two years old.
“Self-employed Canadians represent a significant part of the Canadian workforce,” says Romy Bowers, Chief Commercial Office, CMHC. “These policy changes respond to that reality by making it easier for self-employed borrowers to obtain CMHC mortgage loan insurance and benefit from competitive interest rates.”
Currently, a self-employed person is considered high-risk by lenders. Entrepreneurs’ incomes often fluctuate and are less predictable than someone on contract with a salary. Even a business owner who has put themselves on payroll with a salary can have a hard time sitting down with a lender and proving that they can afford mortgage payments.
Here’s an example of a self-employed person that has the income to qualify, but may be rejected by a lender:
Say John starts his own public relations company and he’s a one-man show. He has a few loyal clients from his years in the industry and at the moment he can handle the workload on his own.
A year and a half into the business, he’s doing well and wants to buy a new condo in downtown Toronto. He has the 20% down payment but when he goes to the bank for a pre-approval, they give him a hard time. Why?
John incorporated his business and put himself on payroll. His salary is low to keep him in a lower tax bracket and he’s paying himself in dividends and keeping money in the business to have a good cushion for operating expenses.
The bank looks at his $30,000 salary and thinks there’s no way he can afford a mortgage on the condo unit he wants. Of course, the bank will look at his business financials for the last year and a half, but the bank really needs two years of steady revenue and growth to trust that John can afford to make the payments.
To be fair, it makes sense that lenders trust self-employed applicants a bit less than someone with a steady paying job. Given the scenario outlined above, John could lose one of his big clients a few months later and suddenly not have the income to make his payments.
In an age where more millennials are freelancing, starting businesses, and even some retirees are starting their own part-time businesses and deciding to live semi-retired, mortgage lending must adapt, so we’re happy to see CMHC taking these steps.
There aren’t a lot of details available at the moment, but CMHC will be providing lenders with more guidance and flexibility for reviewing self-employed applicants. CMHC will also create a list of examples of documentation that can be used to support an application to help meet income and employment requirements.
The changes will take effect October 1, 2018.