The self-employment boom
Over the past two decades the rate of self-employment in Canada has been remarkably steady, representing between 15 and 16% of total employment. In 2020, at the height of the pandemic, the portion of solo self-employed Canadians increased to 73% of all self-employed Canadians (Fig 1). Solo self-employment, individuals who work independently for themselves without any employees, has become the most common type of self-employment.
With freelancers, micro-business owners, gig workers, and contractors steadily on the rise, it’s likely that many of them – just like people with permanent jobs – might be considering buying homes.
There is, however, a perception that qualifying for a mortgage is harder than it might be for someone who can’t produce months’ worth of pay stubs. And yes, it has its challenges. But there are lenders that are willing to help. Here are few pointers to get you on the road to getting that mortgage.
Salaried employees generally earn the same amount of money every month. When you’re self-employed, that’s not necessarily the case and lenders may want to examine your bank statements more closely. Ultimately, the bank needs to know that your monthly income is stable enough to cover your mortgage repayments every month.
Many self-employed people don’t necessarily draw a regular salary. If the business is a registered entity, it’s often likely that they will write off business expenses or simply draw when they need to. If you’re looking at applying for a mortgage, you need to look good on paper. So, pay yourself a regular salary every month – even if you ultimately put the money back into the business at a later stage.
As much as we like to help with tax planning, when planning to request a new mortgage, tax advice can run counter to what the financial lender wants to see for a certain level of income. It pains us to say this, but for a limited time you may want to consider cutting down, or deferring, certain business write-offs so that you can paint a better picture of what your buying power really is to any potential lender, thereby (sign) increasing your taxable income. Higher taxable income, higher taxes, but the opportunity to secure that mortgage you desire.
For example, for those using a workspace in home you may want to consider not claiming home office expenses. In addition, you may consider postponing the purchase of new office furniture or computers, if you can defer one year. Deferring certain purchases may also lower credit card/payable debt that could count against your borrowing capacity. Where possible, consider using subcontractors in the short-term versus salaried employees to avoid additional payroll expenses/taxes. Again, this advice is temporary, one to two years max, while you prepare your financials to be mortgage ready.
Keep the taxman happy
Make sure that your business tax returns are all up to date and make them available to lenders. Some lenders will request two years’ worth of business tax returns, but in some cases, one year will suffice. These help lenders see whether you’ve been earning consistently for a period of time.
Stay on top of profits and losses
Since you don’t get pay stubs, a profit and loss statement is the next best thing for a lender.
This helps the lender gauge whether or not your income matches what you declared on your tax return. A professional accountant can prepare your profit and loss statement for you. Lenders will also want to see financial statements. That includes bank account statements, policies, and assets. Lenders assess these to make sure your cash flow is sound enough to cover mortgage expenses.
Also, bear in mind that buying a home generally requires a down payment. That ranges from about three to five-percent of the value of the home. You’ll also have to cover closing costs, which are for a similar percentage. Make sure you have savings aside to cover those or the deal may fall flat.
Speak to someone in the know
While these pointers are good to remember, having a professional accountant and tax practitioner in your corner is a great help when you’re trying to buy your dream home.