New mortgage rules will make borrowing easier for self-employed
By Mia Clarke, Associate Editor
New mortgage rules recently announced by the Canadian Mortgage and Housing Corporation (CMHC) should make it easier for self-employed workers to secure mortgages, Toronto real estate lawyer Matthias Duensing writes in The Lawyer’s Daily.
“As discussed in a previous article, in November 2017 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,” writes Duensing, principal of Duensing Law.
“Self-employed Canadians have long faced several barriers to obtaining loans, due primarily to the variability of their incomes,” he writes.
“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.”
Duensing says one of the most difficult burdens to overcome is the dichotomy between taxes and mortgages. In order to reduce the tax burden, “the very reasonable inclination of a small business owner (and their accountant) is to do everything legally possible to reduce taxable income.” But when trying to get a mortgage, the goal is “to demonstrate the largest possible income.”
He says “the two purposes are at odds to one another, with no clear solution.”
The situation worsened in January 2018 with the introduction of the new mortgage affordability stress test rules, “which has severely curtailed the housing market across Canada,” writes Duensing.
“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,” he says.
“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,” writes Duensing.
He notes that CMHC has suggested using additional documentation — including reviewing the Canada Revenue Agency's Notice of Assessment along with its T1 General, Proof of Income Statement, and the T2125 (Statement of Business or Professional Activities) — to help assess the financial status of self-employed mortgage applicants.
“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,” writes Duensing. “Buying a home may now be an achievable goal for this long-overlooked community.”