We live in the digital age of entrepreneurship, but for many Canadians, this means qualifying for a mortgage has never been more difficult.
It is estimated that about 10% of Canadian workers are self-employed,[1] a figure that has increased steadily since the financial crisis. With the continued expansion of the digital economy, self-employment through online business is expected to expand continuously. While great for the economy, self-employment has one major side effect: qualifying for a mortgage.
You could be raking in hundreds of thousands of dollars each year through your business, but a failure to provide “consistent income” (i.e. a regular biweekly pay cheque) will leave you struggling to qualify for mortgage financing. Tighter regulations over the past few years have meant that more self-employed Canadians are hitting the mortgage wall, despite most metrics showing they enjoy a higher median net worth than 9-5 employees.
B-20: A Brief Overview
It all harkens back to the government’s Guideline B-20, which came into effect in 2012. The rule requires federally regulated banks to look more closely at incomes before approving mortgages. In practical terms, this means the dreaded biweekly cheque is what determines approvability.
Before Guideline B-20 came into effect, being self-employed rarely stopped anyone from obtaining a mortgage. The evolution of the industry following the US subprime mortgage crisis has created stricter lending terms north of the border, as policymakers looks to avoid a 2008-style meltdown.
Industry Responds
In response to these changes, mortgage brokers have stepped up to connect self-employed Canadians and unincorporated business owners with the financing they need. This has created a burgeoning market for brokers and other service providers with exposure to both bank and non-bank funding sources.
Canadian Mortgages Inc. (CMI), a Toronto-based mortgage services provider operating in four provinces, has made serving the self-employed one of its major target markets. Now, five years and millions of dollars of financing later, more unincorporated business owners are obtaining the housing financing they need. CMI does this by tapping into the nation’s top private lenders to find custom mortgage solutions that can meet virtually any criteria. The rationale is that there’s a lender out there willing to finance your mortgage at favourable terms. Just don’t expect to get connected with them at a major bank if you are one of the millions of unincorporated business owners.
New Mortgage Rules
Ottawa’s newly announced mortgage rules will also dampen the outlook for many potential homebuyers, creating more space for the broker industry to thrive. According to the Canadian Real Estate Association (CREA), the impact has already been felt.
“The government’s newly tightened mortgage regulations have dampened a wide swath of housing markets, including places not targeted directly by the government’s latest regulatory measures,” said President Cliff Iverson in CREA’s latest monthly bulletin.
National home sales declined 5.3% in November, the largest monthly decline since August 2012.[2] The new mortgage rules were implemented the previous month.
CREA’s chief economist Gregory Klump also warned that the November results don’t bode well for an economy that relies on housing for much of its direct and indirect growth. With demand for real estate rising and lending terms tightening, brokers are likely to see higher foot traffic in the coming months as buyers look for alternative solutions. The ability of brokers to link buyers to the financing they need is critical for the health of the Canadian economy. After all, housing activity generates multiplier economies via spin-off spending. Weaker prospects in this sector will add an additional source of uncertainty with regards to the economic outlook.
References
[1] Industry Canada. Key Small Business Statistics.
[2] Canadian Real Estate Association. Monthly Stats Highlights.
