Why it’s harder for the Self-Employed
Five years ago being self-employed and getting a mortgage was typically not an issue. Living and working on the North Shore, a large group of my clients are self-employed. Many self-employed people lower their taxable income by writing off business expenses and other deductions.
What they show for taxable income is often an inaccurate representation of their actual income and their ability to manage mortgage payments. In the past, we managed this by stating a reasonable declared income and providing our lenders with proof that the client is self employed as well as documentation to support that the income that they are stating is reasonable for their line of work.
In July 2012, the Office of the Superintendent of Financial Institutions (OSFI) who is Canada’s financial regulator quietly introduced Guideline B-20: Residential Mortgage Underwriting Practices and Procedures.
Literally overnight, it became a lot more difficult for self-employed individuals to qualify for a mortgage without significant planning.
B-20 requires the banks to examine self-employed more closely. The intention is for self-employed borrowers to start declaring more income and paying higher income taxes in order to get a mortgage.
Stated income mortgages still exist but are tougher to obtain. For conventional financing, you can make a 35% down payment but you will have to demonstrate that you have assets and net worth. If you have less than a 35% down payment, you will be paying mortgage insurance premiums through Canada Guaranty, or Genworth, and these premiums are significantly higher than those who prove their income.
Borrowers who don’t qualify under these stated income programs are often left with the option of going to secondary lenders that will provide them with a stated income loan at a higher interest rate. These lenders are only available with a 25% down payment or more.
So, if you’re self-employed and wondering if you should start paying more income tax now in order to qualify for a mortgage down the road, you’re not alone.
Ask yourself, does it make more sense to pay a higher interest rate and increase your annual cost of borrowing, or to pay significantly higher income taxes? Some of my borrowers are opting to pay higher rates and still enjoy the lower tax bracket.
There is no “one size fits all” solution in this case. If you are self-employed and you want to know which solution is best suited to you and your situation, we should talk! I would love to help you figure it out.
Either complete the form below or take a look at my contact page and find your preferred method of contact. I look forward to hearing from you!
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