The Government of Canada has significantly tightened mortgage rules for self-employed individuals over the last few years and this squeeze is going to continue even more.
In June, 2012 the Federal Government and the Office of the Superintendent of Financial Institutions Canada (OSFI) announced changes to the way Federally Regulated Financial Institutions manage their mortgage portfolios and, specifically, how they adjudicate mortgage applications. These changes have certainly affected the way we do business, and one place in particular where we’ve seen a big impact is the area of the self-employed mortgages.
Previously a self-employed borrower was able to provide proof of income in many ways. They could use a notice of assessment, tax returns, bank records, business invoices or simply a signed disclosure stating their income if more traditional methods of confirming income were not available. This is now going to change.
Under the new rules, federally regulated lenders are expected to exercise a greater degree of ‘due diligence’ when it comes to the self-employed applicant. This means we must provide income confirmation that is deemed to be ‘credible’ which includes a Notices of Assessment, Tax Return (including T2125 – Statement of Business Activities), accountant prepared Financial Statements, etc.
While it is still feasible in some instances to use stated income programs and ‘declare’ income, this income must be seen as reasonable for the profession and supported by arms-length documents such as bank records, invoices, etc.
The maximum amounts available to the self-employed have also changed. Conventionally (uninsured) most lenders are now requiring 35% down although there are still some that will allow up to 80% financing. Under the insured mortgage programs you need a minimum of 10% down on purchases.
What we want to emphasize here is this. The government and the Banks are going to make it more difficult for those of you that are self-employed to borrow more money. This is especially the case for those self-employed borrowers that write down their income significantly. Our suggestion for self-employed individuals going forward is to declare more net income on their tax returns. If you don’t start to declare more income now (starting in 2012) your ability to borrow money is going to be restricted in the future or you may be forced into higher interest rate loans/mortgages.
For more information on Bill B20 go to www.osfi-bsif.gc.ca and search for Principles for Sound Residential Mortgage Underwriting Practices.