by Ross Marowits

The self-employed are among the growing number of Canadians turning to private lenders in order to obtain a mortgage.

While many prospective homeowners are driven to alternate lenders because of government-mandated stress tests and poor credit scores, the self-employed often have additional burdens to overcome in proving their income.

“There’s more and more people seeking private loans than ever before and that’s a direct result of government making it more and more difficult to qualify,” says Dan Caird, a mortgage agent with Dominion Lending Centres.

According to the Bank of Canada, private lenders have doubled their share of the mortgage market since 2015, accounting for eight per cent of Canadian mortgages in 2018, and an even greater share in the hot real estate market of Toronto.

These lenders are less concerned about income and more focused on the property’s value in case they have to foreclose. The tradeoff is higher interest rates and fees.

Still, the option can be helpful for the self-employed who expense as much as they can in order to reduce their taxable income and who have a strategy to beef up their credit score with a goal of returning to a traditional lender.

Caird said it’s usually more financially advantageous to “expense the heck out your business” and show less income.

“Sure you’re going to pay a half a per cent, a per cent, sometimes two to three per cent 1/8more 3/8 on your mortgage but …they usually end up coming out ahead by claiming less income and just paying a bit more on the mortgage,” he said in an interview.

However, the writeoffs make it harder for lenders to obtain the 35 to 44 per cent debt-to-income ratio sought by traditional lenders.

Proving a sufficient track record of income to qualify for a mortgage can be the biggest challenge for people who work for themselves.

“Assuming a self-employed borrower had great credit and ample equity, we used to be able to simply state their income to the bank and show a notice of assessment to prove no taxes owing,” said Robert McLister, found of mortgage news website RateSpy.com

“Those days are long gone.”

The government now wants verifiable proof of true earnings while the stress test makes the hurdle even higher by requiring almost 20 per cent more provable income to qualify for the same mortgage available in 2017, he said.

That has pushed more people to alternate lenders.

“Self-employed mortgages without traditional proof of income are a different animal from your cookie cutter AAA bank mortgage,” McLister added.

The Canada Mortgage and Housing Corp. is trying to ease the paperwork required to obtain mortgage loan insurance, said Carla Staresina, vice-president risk management, strategy and products.

It introduced changes last October that suggest additional factors lenders could consider if the borrower has been operating their business for less than two years, including having sufficient cash reserves, predictable earnings, acquisition of an established business and previous training and education. It is also encouraging acceptance of a broader ranger of documents.

“Our aspiration really is to make sure everyone in Canada has a home they can afford and that meets their needs,” Staresina said from Ottawa.

“We know self-employed Canadians make up about 15 per cent of Canada’s labour force and so we want to make sure that any difficulty that they have in qualifying for a mortgage is mitigated and that we’ve got some options for them.”

McLister said the program will help “at the margins,” particularly those who recently started a business or bought an established operation.

Caird said there’s been some other steps in the right direction. He pointed to a new product from the Bank of Nova Scotia that allows incorporated companies to use retained earnings in the business to help applicants qualify.

Genworth Canada and Canada Guaranty also have programs to help self-employed borrowers, but require the business be open for at least two years.

The mortgage broker’s task is to convince lenders that the borrower is a good credit risk by adding back specific deducted expenses to net income to improve the debt-to-income calculation, said Caird.

While having a sound credit history is very helpful, mortgages can still be obtained for those with less-than-stellar records, for a cost.

Three essentials for borrowers are to have up-to-date taxes, be organized and consult a mortgage broker long before the mortgage is required.

“If your taxes aren’t up to date it’s going to be next to impossible to get a lender to give you a mortgage at any sort of reasonable rate or term.”

The Canadian Press

In the March Federal Budget, the government introduced a few changes that impact the housing and mortgage markets. One of the changes, a Shared Equity Participation Mortgage with CMHC as a partner with the homeowner will not be implemented until the fall. At this time, we do not know the full details of the program. We have had some clients wonder if they should wait until the fall to buy a house.

What we do know;

• Maximum family income of $120,000.
• Maximum mortgage is 4 times the income.
• Maximum shared equity loan 5% for existing houses.
• Maximum shared equity loan 10% for new homes.
• Must be an insured mortgage.  ( we think )
• We know that 4 times income is a smaller amount than what home buyers qualify for under current rules.

What we do not know;

• What will be the terms of the Shared Equity Mortgage with CMHC?  Will the homeowner be able to renovate their home without government approval? Will the homeowner be able to refinance the mortgage without government approval? What happens if the homeowner misses a payment?  When the home is sold, what are the terms of repayment? If there is a spousal break up, what happens with the responsibility for the shared mortgage? Will the government have a claim against the profits if there are any?  How will the CMHC Premium be calculated? Who pays the extra cost of registering the Equity Mortgage?

What we can guess;

• Depending upon the purchase price, and whether there is no interest and no equity claw back and whether the home is an existing home or a new home, the home-buyer could save approximately $500 to $700 per year on an existing home and perhaps double that on a new home. A claw back would sure take the fun out of it. The government telling you how to manage your equity would also take the fun out of it.
• Five year fixed interest rates have taken a dip this spring from rates available late last year. We can guess this is a spring dip and not a long-term trend, so rates may well be higher in the fall.

Is it reasonable to put off a purchase, hoping the program does not have too many warts, hoping that interest rates will remain low, hoping the house that is currently available and a current bargain is still on the market at the same good price in the fall?

Calgary homes are currently on sale. We suggest if you or your buyers find the ideal home, and it is at a good price and the payments fit the budget, buy now. Do not wait for a program that may or may not be helpful.

Take advantage of a sale when it is happening.

For some more reading on this please see this article from Dr. Sherry Cooper.

Croft Axsen – Jencor Mortgage

The recent data sure has changed the tone of rates in the coming months.

The prime rate – what variable rates are based on, while a few short weeks ago was expected to rise three times in the next 18 months now with the data on the slowing of the market and uncertainty in projects moving forward as expected, there are signs increases could be delayed until next spring.

The bond market- what fixed rates are based on, has dropped, which means rates (after the banks have hung on as much as possible ) should come down slightly.

What does his mean for borrowers? Let’s break it down per segment

1. Homebuyers – more affordability due to the recent dip in prices – pending price category anywhere from 10-30%. Remember, working with an unbiased mortgage professional we do a full look back upon closing to ensure the lowest cost of borrowing.
2. Home sellers – price sharp if you want to sell or else no point in being on the market.
3. Renewals rejoice – payment shock shall be reduced upon renewal.
4. Those carrying debt outside of a mortgage ex: credit cards, car payments, lines of credit – now is your time to see how much money moving that debt into a new restructured mortgage will improve your cash flow. It’s the most effective strategy for protecting your credit.

The most constant theme in everything above: The market is always changing, yesterday’s news is exactly that. Aligning yourself with the frontline experts who will help you with clarity in the ever-changing market. This is why while experts can give you the data on the current market – it’s always subject to change. The decisions a borrower makes is their responsibility to adapt to. If you have any questions, contact your local Dominion Lending Centres mortgage professional.

ANGELA CALLA

Dominion Lending Centres – Accredited Mortgage Professional
Angela is part of DLC Angela Calla Mortgage Team based in Port Coquitlam, BC.

Recently I was finishing up a mortgage with a young couple who had just had a beautiful baby girl. I brought up the topic of mortgage and life insurance as well as getting a will written up. The response from the husband was that it was such a morbid topic and a real downer when they were excited about their new home.

The fact is that people, even young people die from car accidents, cancer, and even accidental drownings while on vacation. It’s a topic everyone avoids but it needs to be addressed, particularly when you are taking a major financial step like buying a home. What would happen to your spouse if you died suddenly with your mortgage not paid off?

I spoke to a major Canadian mortgage company about this topic.
I asked if the surviving spouse would be kicked out of the house. “ When someone dies who was on our mortgage we want to know right away . We ask for a copy of the death certificate so that we can take them off title. We will let the mortgage run it’s term if payments are being made on time. Many surviving spouses receive a life insurance policy and can pay off the mortgage or at least keep up the payments. We will renew the mortgage if payments are up to date. However, should the surviving spouse want to refinance the mortgage they would have to re-qualify for it.”

So what can you do to make life easier for your family should you die with a mortgage on your home? The easiest option is to have sufficient life insurance to ensure that they can keep up payments or to pay off the mortgage. Dominion Lending Centres mortgage professionals all offer MPP (Mortgage Protection Plan), a life insurance policy that pays off the mortgage in full in case of the death of the policy holder. The payments never go up because the mortgage balance is going down as the insured person gets older.

Another option is term insurance or whole life insurance. Speak to your favourite insurance broker about this.
Finally, if the surviving spouse is 55 or older, and they can’t afford to maintain the mortgage, a reverse mortgage may be the solution. No payments are made on the principal unless you decide you want to. When the widow(er) moves out the sale of the home pays off the mortgage and interest.

While it can be a “downer” to talk about death and disability, a responsible home purchaser needs to have the conversation with their Dominion Lending Centres mortgage professional at the time of their purchase, refinance or renewal. The sudden death of a family member causes enough grief for the survivors, why add to their misery. As the old commercial used to say “Why wait for spring, do it now”.

Originally posted by:

DAVID COOKE

Dominion Lending Centres – Accredited Mortgage Professional
David is part of DLC Jencor Mortgages in Calgary, AB.