Self-employed Canadians have always had a harder time getting approved for a mortgage due to a higher-risk borrower profile. As of April 9, getting a mortgage became even more difficult for business-for-self clients due to new CMHC rules that are receiving mixed reviews from the mortgage broker community. The new rules change a number of things. First off, self employed borrowers with more than three years in the same business, as well as commissioned-income borrowers, are now required to provide traditional proof of income (or "third-party validation") to qualify for a loan.
Traditional income validation is available through documents like financial statements, contracts and T4s. The CMHC said the rule changes will ensure that self-employed borrowers with third-party validation will benefit from a lower premium. Those who have recently become selfemployed and don't have third-party validation can still apply for a mortgage, but have to come up with a 10 per cent down payment instead of five per cent. Refinancing will also be cut to 85 per cent loan to value instead of the previous 90 per cent.
The decreased likelihood of approval for recent self-employed borrowers is something Vancouver-based Verico broker Mark Fidgett has a problem with.
"I don't think this was a good decision," said Fidgett, who runs Notapennydown.com. He added that if the new guidelines were actually beneficial, they should have been introduced a long time ago. "It doesn't make sense now."
The CMHC originally came out with a program for self-employed borrowers in March 2007 when it realized the notice of assessment for business owners and entrepreneurs wasn't always a true reflection of their real income.
"When the CMHC came out with this program, they advertised it by saying they understand that small businesses of Canada oil the wheel, that they help float the economy," said Fidgett. "And now they're taking it away. They're saying you can only
use [the program] in year three."
Self-employed borrowers often write off a large portion of their income for tax purposes, but the changes make such actions conflicting for those looking for loans, Fidget added.
"I'm a business owner as well, and we all pay an accountant to write off as much as possible to make our taxable income as low as possible," he said. "Our income tax is low, but on this program now, it's like you need to add everything back."
Private lenders, meanwhile, are out of the scope of the CMHC and could stand to benefit from the new rules. A private lender who wished to remain unnamed confirmed her expectation with CMP that the upcoming changes will bring more potential borrowers pushed away under the new guidelines her way. And while some brokers, such as Fidgett, have openly criticized the move by CMHC, others such as Stephen Gilmour of Dominion Lending Centres Alliances in Oshawa, Ont., were steady in
"The more people who default on loans, the worse the market becomes," he said, noting he felt a lot of self-employed people have qualified formortgages when they shouldn't have.
"This provision for self-employed is going to put the right people in the right structure of home."
Gilmour added that the timing of the changes could be due to the struggles that the U.S. housing market continues to face.
"I don't think they made the decision based on the Canadian market - we're fine. Sales are up and listings are down, which is great," said Gilmour. "I just think they're looking at the housing situation in the U.S. and trying to prevent us from having the
same thing here." But not everyone agrees. Fidgett said he finds fault in this reasoning, questioning if the CMHC is "running scared."
"I think it's a gut-wrenched reaction to what's happened in the U.S.," he said. "I wrote on my Twitter that when the U.S.
sneezes, CMHC gets pneumonia." Fidgett said he has already had a couple clients call him in frustration, expecting that they'll no longer be able to get approval. When he called CMHC for an explanation of the rule changes, he said the reason they gave him was that too many people were abusing the system. While some recent changes already passed, such as matching listed salaries for selfemployed with those expected for such a profession in Canada were positive, Fidgett said the latest move was "off the wall" and is hoping that if enough people talk about their displeasure with the changes, the CMHC
might alter its decision.
But for others like Zoltan Padar, the owner of Mortgage Pro Ltd. in Alberta, the rule changes are barely a blip on the radar.
"The CMHC always wanted a certain kind of documentation for self-employed people anyway," Padar said. "Basically, in my mind, there's really no change. The rules and regulations haven't really changed at all." He also doubts the suggestion that private lenders will get more business due to moreself-employed borrowers being shut out.
"Private mortgages are much more expensive," he said. "People aren't going to go for it."