Self-employment certainly comes with its benefits; you get to be your own boss, you get to make your own hours, and you get to build a company that’s all on your own, enjoying the spoils along the way. It does, however, have its challenges; long hours, a lack of support, and, in the case of buying a home, higher barriers to entry.
It’s no secret that qualifying for a mortgage as a self-employed Canadian is more difficult than for those in more traditional professional roles but, with some planning, self-employed Canadians won’t have too much trouble getting into the housing market.
The key, according to James Laird, president of CanWise Financial, is to be organized and avoid cutting corners when it comes to taxes.
“Make sure your documentation is all in order,” he said. “Anyone self-employed who might be considering minimizing their income through earning in cash and not declaring it, or writing down as much as they possibly can should realize there is a trade-off for their tax strategy and getting a mortgage.”
Self-employment in Canada
First, some background on self-employment in Canada.
At the end of 2017, 2.8 million Canadians (15% of the workforce) were self-employed, according to Statistics Canada. Those numbers were backed by up CMHC in mid-2018.
That’s a lot of Canadians who, just like more traditionally employed Canadians, dream of home ownership. However, self-employed Canadians tend to have a more arduous process when qualifying for a mortgage.
Qualifying for a Self-employed Mortgage
The problem with qualifying for a self-employed mortgage is that it’s difficult to prove income to lenders. That, coupled with the fact that many business owners tend to expense as much as possible to minimize the taxes they pay, lenders have to be a little more discerning when it comes to issuing mortgages to them.
Prior to 2014, self-employed Canadians had a fairly easy time qualifying for a mortgage. However, at the end of that year, the Office of the Superintendent of Financial Institutions (OSFI)—the country’s banking regulator—introduced Guideline B-21, which requires federally regulated banks to look more closely at self-employed incomes before approving a mortgage application.
So, along with providing 2-3 years’ worth of notices of assessment and tax returns, self-employed borrowers must also provide the following;
- Proof that your HST and/or GST is paid in full;
- A copy of your business licence or articles of incorporation showing you’re licenced;
- Financial statements for your business. You have to ready to explain your business—your income, expenses, and when you’ll break even;
- Proof that you are a principal owner in the business;
- Client contracts showing expected revenue for the coming years; and
- Have a down payment available of at least 15%.
The good news, though, is that the government has made efforts to address the additional hurdles self-employed Canadians face when trying to purchase a home.
The Canada Mortgage and Housing Corporation (CMHC) announced last summer changes that are meant to make it slightly easier for certain self-employed Canadians to get a mortgage.
The changes were meant to allow lenders more flexibility when evaluating applications for these borrowers. They went into effect in October and allow borrowers to submit Proof of Income Statements, and Statements of Business or Professional Activities as additional ways of proving income.
So, while self-employed Canadians might have to provide more documentation, an applicant with the right documents in order – and the right risk profile — shouldn’t have too much trouble qualifying for a mortgage in 2019.
The Bottom Line
It might be a little more time consuming to get a mortgage as a self-employed Canadian, but with diligent planning, strong organizational skills, and a dedication to properly recording income for tax purposes, achieving the dream of homeownership is easily attainable. And, to make sure you get the best mortgage rate available, make sure to speak to a mortgage broker.