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By Reza Ghazi, Broker at Mortgage Edge

www.rezaghazi.com

Before the effects of 2008’s global recession, particularly in Canada, it was much easier for self-employed individuals to obtain a mortgage on Real Estate-based assets. After the recession, the higher level of risk and uncertainty present in the Canadian economy forced mortgage lenders to reconsider their policies, and take further precautions with respect to their clients in the business sector. Specifically, these new security measures were implemented after the Ministry of Finance introduced new restrictions against the creation of a ‘bubble’ that would have threatened the stability of the Canadian economy. Unfortunately, however, the introduction of these policies has imposed further restrictions on self-employed individuals applying for mortgages. These restrictions can be summarized as follows:

1. Applicants can no longer purchase a residentially-zoned property with a 5% down payment. The Canada Mortgage and Housing Corporation (CMHC), which enjoys the highest market share in the Canadian Mortgage Default Insurance Market, and which is solely owned by Canadian Government now requires all self-employed applicants to place a minimum 10% down payment. Due to the fact that most Canadian mortgage lenders adhere to CMHC’s guidelines, this restriction will significantly hamper the ability of self-employed individuals and business owners to enter the Real Estate market.
2. Applicants can no longer refinance their properties up to 90% of the value of their homes. Under the new regulations, applicants may only borrow up to 85% of the determined property value from the insurer. This policy has limited the access to equity that individuals may have had accumulated in their properties.
3. It is now required that all applicants be active in their current line of business for more than two years, but not more than three in order to qualify for the ‘Stated Income’ program. Essentially, to the extent that one’s stated gross business income falls within the parameters typical to one’s industry, one can qualify for the program. However, in the event that one has been active in their business for over three years, in adhering to CMHC guidelines lenders will require that the source of income be verified, and will not permit applicants to take advantage of the program. Specifically, average income for the past two years is assessed based on Line 150 of the Notice of Assessment (the document received upon filing taxes with the Government), with an additional 15% being added. It is this new figure which is used in determining applicants’ qualification for the program, which has substantially reduced the number of self-employed individuals who can qualify for the program.

As is well-known, due to write-offs, most business owners’ net incomes are relatively low, which makes qualifying for the program even more difficult. However, there are ways to overcome such obstacles, such as dealing with insurers in the Canadian Mortgage Market that are not associated with the Canadian Government. These insurers on average tend to be less strict with respect to guidelines for self-employed applicants seeking mortgages, although one can only take advantage of the services of such institutions if they have formal agreements with non-Government insurers. There exist very few institutions which follow non-Government guidelines that can be considered as viable alternatives.

Additionally, Canadian Trust companies have created alternative programs for those applicants who do not qualify for the aforementioned programs, most often due to a lack of income documentation. These companies typically employ interest rates slightly higher than those of traditional mortgage lenders, and in some cases administration fees must be paid, although in many cases this has enabled borrowers to enter the Real Estate market sooner. Nonetheless, self-employed individuals are encouraged to document their stated income as best they can, as this will save them substantial amounts of money related to insurance premiums and interest rates, and in some cases, even allow for down payments as low as 5%.

Furthermore, another regulation that has affected all applicants, including self-employed individuals relates to the ‘Qualifying Rate’ used on mortgage applications. For high-ratio insured loans (for less than 20% down payments) with fixed terms less than five years (one to four), and for all variable rate mortgages (Prime -/+), despite the duration of the term, the qualifying interest rate is the greater of the benchmark and contract rates. The Bank of Canada’s five-year benchmark interest rate is the average of the five major banks’ posted five year rates, which is essentially the new qualifying rate for one to four year term and variable rate mortgages. Currently, the benchmark rate being employed is 5.29%, a rate significantly higher than the previous one used for qualification. In short, this regulation has limited applicants’ selection of mortgage options with respect to Variable and Fixed mortgages.

The restrictions discussed are those which have most substantially affected self-employed borrowers. There exist many more limitations (e.g. restrictions on second properties) that are situation-specific, and can only be elaborated on after assessing one’s financial situation.

About the Author

Reza Ghazi is a Broker at Mortgage Edge, a licensed broker of the Financial Services Commission of Ontario, and a member of the Independent Mortgage Brokers’ Association of Ontario.

Reza can be contacted via telephone [(416) 712 3210] and email (info@rezaghazi.com). For additional information, you may visit his website at www.rezaghazi.com.

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