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New CMHC guidelines could open doors to financing for self employed

Muhammad Arif Omari, a driver from Edmonton, was set to renew his mortgage in September when he was told he wouldn’t be able to switch to a new lender offering a lower rate because he was self-employed.

Mr. Omari, a truck driver who did not like the long stretches away from home, quit his job over the summer after many years, with plans to become a self-employed cab driver. But he soon learned no new lender would approve a mortgage under the circumstances, despite the fact he had enough savings to cover payments and other household expenses, and his wife was employed.

"I was told [by a mortgage broker], ‘Just stick with your bank. No matter that the interest rate is greater – you have no other choice for now,’ ” he says. Being unable switch lenders meant renewing at a rate that was 25 basis points higher than what a competitor would have offered (100 basis points equal one percentage point).

New guidelines from Canada Mortgage and Housing Corp. (CMHC) come into effect Monday that could make it easier for self-employed borrowers such as Mr. Omari to qualify for financing. The changes apply to borrowers putting down less than a 20-per-cent down payment and seeking CMHC’s high ratio default insurance, as well as, in certain cases, where borrowers are putting down more than 20 per cent but default insurance is required by the lender.

The move falls in line with the federal government’s Canadian Housing Strategy, a 10-year, $40-billion plan to help more Canadians access affordable housing.

Prior to Monday’s changes, it was tricky for prospective borrowers to get a loan if they had been self-employed for less than 24 months. The new enhancements allow newly self-employed people to be considered through additional factors such as whether they acquired an established business, whether they have enough cash reserves or predictable earnings, and what kind of training and education they have.

In addition, various income documentation can now be included to help satisfy the necessary requirements, such as Canada Revenue Agency’s notice of assessment and the Statement of Business or Professional Activities (form T2125).

“We felt that there is a definite need to address this particular demographic and to make sure they get a fair chance at qualifying for financing,” said Olga Coulter, a senior account manager at CMHC.

According to the agency, some 15 percent of Canadians – entrepreneurs, doctors, small-business owners, and many others – are considered to be self-employed. That percentage is projected to increase, owing to the growing “gig” economy.

Those in the self-employment and housing sectors welcome the changes, saying it opens the door for self-employed individuals who have the means but were previously unable to qualify.

“We had experienced a lot more difficulty or push-back from the lenders … it makes mortgage brokers not like to deal with self-employed people as much,” said Nalie Nguyen, an executive director at broker Dash Mortgage, who added the new guidelines should ease some of those challenges.

Ms. Coulter emphasizes that the new changes are only guidelines and that lenders and other CMHC partners have leeway to interpret and apply them at their own discretion. “They can choose to take them the way they are, they can choose to add their own enhancements to it, they can choose to add only a portion,” she said.

Toronto-Dominion Bank, for example, said in an e-mailed statement that it reviews all potential borrowers on a case-by-case basis and that it would be making changes “to reflect some of CMHC’s new guidelines," including looking at documents, such as the personal income tax T1 General Form, to help meet requirements.

Ted Mallett of the Canadian Federation of Independent Businesses says limited options for borrowing have long been a concern for self-employed individuals. “It may have pushed people towards the shadow banking sector, the Wild West,” said Mr. Mallett, the organization’s vice-president and chief economist.

Alternative lenders tend to charge higher interest rates, which can boost costs considerably. According to Justin Thouin, chief executive of rate-comparison site LowestRates.ca, a borrower in Toronto or Vancouver paying an extra percentage point could pay $5,000 more in interest a year, and more than $125,000 extra over 25 years.

The CMHC enhancements follow new federal guidelines that took effect at the start of this year, which required major lenders to apply a “stress test” to potential borrowers.

David Binn, a real estate agent in Toronto for more than a dozen years, said he experienced firsthand the double impact of being both self-employed and getting a mortgage under the tighter rules.

“I’ve done quite well over the last number of years, and the amount of scrutiny I was put under to purchase a home was mind-boggling,” said Mr. Binn, a realtor at The Binns Group with Keller Williams Advantage Realty brokerage.

“It’s so refreshing the CMHC is finally recognizing that self-employed people play such a vital role in the Canadian economy.”

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