Thursday, February 09, 2012

Mortgage lending to self-employed in jeopardy

Recently there has been a disturbing rumour circulating with regard to a report issued by the Office of the Superintendent of Financial Institutions (OFSI). That report suggests that lenders are too loose with their guidelines with regard to the Business for Self “stated income” programs. Because of that report the Ministry of Finance is watching the housing market closely to see if changes are warranted.

There have already been a number of changes to mortgage lending rules over the past two years to ensure that Canada does not experience a housing meltdown similar to what occurred in the U.S. New rules were also put into place to protect homeowners in the event of interest rates rises, which is not a bad thing. However, changing the rules for the self-employed may not be a prudent move.

Consider this: There are 2.7 million self-employed workers, representing 15.7 per cent of all workers in Canada or put another way, one-in six workers is self-employed, according to Statistics Canada.  The number of self-employed workers increased by 12 per cent over the past decade, while the growth of the overall labour force was 18 percent. Slightly more than one-third of them are female, who account for 35% of all self-employed individuals.

In 2011 the number of self-employed Canadians rose by 2%, double the rate of growth seen in paid employment according to a report by economist Benjamin Tal. Clearly this is a growing trend.

These are people who work on commissions – auto salesmen, insurance brokers, real estate agents and mortgage brokers. Others work for large and small companies contracting out their services. And others start their own bricks and mortar businesses. This type of non-traditional work doesn’t come without its challenges. Imagine starting a project not knowing if it would ever pay you or going through each day not knowing your salary. Or not knowing when your work day will end. Entrepreneurs work without pension plans or safety nets, yet they are considered one of the backbones of Canada’s economy.

Prime Minister Stephen Harper himself said in a speech to kick off Small Business Week, "Through their hard work, dedication and vision, small business owners are generating the jobs and economic growth that are making Canada a competitive and modern economy. They are helping to ensure that our economy emerges from the global economic recession stronger than ever.

Yet, the self-employed face an uphill battle when purchasing a home. Accountants typically offset as much of their self employed clients' earnings as possible to reduce tax liabilities. The resulting low net income can make it virtually impossible for a mortgage to be approved based on mainstream lenders' traditional requirements. So mortgage insurers and lenders developed “stated income” programs that allowed business for self clients to qualify for high ratio mortgages.

Now those programs are at risk. No one knows what the rule change might be or if there will, indeed, be any rule changes at all but already a couple of lenders have eliminated its program. It’s likely other lenders will follow. That means, on top of all the other challenges business for self clients face, it may be tougher to get a mortgage. It’s unfortunate that the government would consider penalizing a sector that plays a vital role in the growth of the Canadian economy.

It’s already tough now get a mortgage. Lenders require sufficient documentation to prove income and further documentation to prove self-employment for a number of years. Businesses for Self clients sometimes need a higher down payment and their credit score is also factored in.

This does not mean that programs won’t exist or that business for self clients won’t be able to get a mortgage – it means that it may become more difficult. And when the rules tighten up, then the services of an experienced mortgage agent becomes even more vital. If you have any questions about the business for Self programs or any other mortgage questions, please contact your mortgage professional. Find yours here:



  1. Being self employed has many benefits. When you are self-employed, you can write off all of your deductions on your taxes. You have the potential to make more income than someone who is employed by someone else. You have the freedom to be your own boss. One of the few times when being self employed has some drawbacks is when you go to get financing for a home or a major purchase. But, here are some things to know that can help you make the mortgage loan process run smoothly when you are self employed.enquire about loan forum

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