People who work for themselves are often hampered in the mortgage market because income is variable and unpredictable. Self-employed Canadians seeking to buy a home may soon find it easier to secure a mortgage after changes announced by Canada Mortgage and Housing Corp. CMHC said self-employed people make up about 15 per cent of Canada’s population, but they may have difficulty qualifying for a mortgage because their incomes may vary or be less predictable.
Changes unveiled by the federal mortgage insurance agency are aimed at giving lenders more guidance and flexibility when it comes to self-employed borrowers. In the changes, CMHC said several factors could be used in future to support a lender’s decision to give a mortgage to self-employed borrowers who have been operating their business for less than two years or have been in the same line of work for less than two years.
Those factors could include things such as:
- acquisition of an established business
- sufficient cash reserves
- predictable earnings
- previous training and education.
Previously, those types of applications could be accepted, providing that a “solid rationale” was noted in the lender’s loan file.
Additionally, the housing agency also laid out a broader range of document options that could be used to satisfy income and employment requirements to qualify self-employed borrowers for a loan. When the changes take effect on Oct. 1, those documents will include such things as:
- a notice of assessment accompanied by a T1 General tax form
- a proof of income statement from the Canada Revenue Agency
- and a form T2125, which is a statement of business or professional activities
“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,” said Romy Bowers, the agency’s chief commercial officer, in a statement. Borrowers who have a down payment of less than 20 per cent of the value of the property they’re buying are required to obtain mortgage insurance. Cynthia Holmes, chair of the real estate management department at Ryerson University’s Ted Rogers School of Management, said the main challenge facing self-employed potential mortgage borrowers today is income documentation, adding that the changes announced seem to increase the flexibility in what lenders can accept.
Young self-employed people
Holmes said she is particularly pleased that CMHC is signalling that they will be more flexible when it comes to potential self-employed mortgage borrowers who have been operating their businesses for less than two years.
“This change could especially help young self-employed people access a mortgage more quickly, which supports innovation and entrepreneurship,” she said.
The new changes from CMHC will apply to self-employed borrowers who:
- have a down payment of less than 20 per cent and require high-ratio default insurance
- have a down payment of more than 20 per cent and are using a lender that insures all of their mortgages
- are switching to a lender that insures all of their mortgages
Other mortgage default insurers, including Genworth Canada and Canada Guaranty, have programs for self-employed borrowers who have allowed more liberal proof of income, such as more flexible documentation requirements. But, unlike CMHC, Genworth and Canada Guaranty require the borrower to have been in business for at least two years, in order to benefit from this flexibility. Contact me today to find out more.