Private lenders have been busy the last few years, and among their best customers are self-employed borrowers.
“As COO of one of the country’s top private lending brokerages, I see a lot of self-employed borrowers in the same set of circumstances,” said Matrix Mortgage Global’s Laura Martin. “Any savvy business owner/operator will want to write off as much of their businesses expenses as possible, thereby presenting a less-than-representative annual income on their T1 General tax returns. A contractor, for example, might bring in $200,000 in revenues but expense $150,000 of it between the cost of building materials, sub-contractors, truck payments, etc. They would put $50,000 down on their line 150 of the T1 General and save quite a bit of tax by doing so.”
However, only declaring $50,000 of income puts them at a decided disadvantage when qualifying for a mortgage.
“Thus significantly decreasing their borrowing and purchasing capacity,” continued Martin. “The B-20 stress test has made it such that Schedule A banks and trust companies have had to turn away 20% more borrowers because they don’t fit the guidelines.”
Ergo, private lenders have watched their market share billow from 3% in 2015 ago to 12% last year. While borrowers with bruised credit comprise a substantial portion of private lenders’ clientele, non-traditional income earners like the self-employed feature prominently, too.
“[Private lenders] are much more willing to view borrowers eligibility from a big picture perspective, in terms of actual affordability, and do not have set cut-off guidelines for income and credit,” said Martin. “Private lenders and MICs [mortgage investment corporations] prioritize the asset above all else, like credit and income.”
According to Statistics Canada, anywhere from 15-20% of Canadians are self-employed, but Martin reckons the actual number is higher.
“If you include those who have a side hustle, such as the ever popular and growing ride sharing and food delivery service companies, you’re looking at something closer to 35%.”
Matrix funded over 400 private mortgages last year, at least half of which were for self-employed borrowers. While rates are higher and as much as 3% in fees are paid, there is some equilibrium.
“In the end, it tends to balance out if one considers the income taxes they saved,” she said.
Private lenders are preponderantly stopgap measures for borrowers, even the self-employed, and private lender Wasah Malik of King Lending Capital says that he redirects clients to B lenders within 12 months.
“Most of my deals are exited after one year, but we guide them through the whole process and eventually send them to B lenders because they don’t have to declare a line 150—they just have to provide six to 12 months of bank statements to show business cash flow,” said Malik, adding that 80% of his clients are self-employed.
“On the B side, they can still get qualified based on the cash flow of their business.”