Canada has 2.67 million self-employed citizens, about 15% of the work force, says CAAMP.

Due to how they report income and deduct expenses, these individuals are frequently reliant on stated income mortgages.

A few weeks back, Bloomberg quoted Canada’s bank regulator, OSFI, as saying stated income mortgages “have some similarities to non-prime loans in the U.S.”

Just weeks before that, CMHC announced limits on bulk mortgage insurance, which lenders use to reduce risk on conventional mortgages.

Given these developments and heightened risk aversion in the industry, it’s not coincidental that mainstream lenders like TD, FirstLine, Scotiabank, Street Capital, etc. have tightened up—or abruptly eliminated—their stated income programs.

Various lenders (e.g., TD, MCAP, First National, Merix Financial, etc.) have also either increased rates for “stated” borrowers, or started charging insurance premiums on conventional “business for self” (BFS) mortgages.

“We’re applying increased due-diligence practices to all Equity Lending credit applications,” said TD on February 12. (TD applied these new rules equally to all of its mortgage channels—both retail and broker—unlike CIBC, which targeted just the broker channel with its new BFS restrictions.)

A few weeks ago, we asked Boris Bozic, Founder/CEO of Merix Financial, how he saw the landscape unfolding for borrowers trying to qualify under BFS and equity programs.

“Firstly, they should be prepared to pay a premium,” he said, “be it in the interest rate or in the added cost of insurance.”

“Secondly, and I suspect this will have an even greater impact, self-employed borrowers will face a more rigorous adjudication process.  Leniency and exceptions to policy will be a thing of the past.”

Equitable Trust President/CEO, Andrew Moor, told us: “BFS borrowers are likely to value the services of a mortgage broker more than ever as a result of the changes in the market.”

He’s certainly right.

Whereas most banks scoff at uninsured 80% loan-to-value stated income mortgages, alternative lenders (which distribute mainly through brokers) offer self-employed financing solutions with:

• far less paperwork
• less hassle
• longer amortizations (e.g., 35 years vs. 30)
• allowance for secondary financing, and
• often no lender fees or insurance fees for strong borrowers.

At present, higher-LTV uninsured BFS lending is the domain of brokers. Banks have far less foothold in this segment of the market.

Yes, the rates are higher than prime insured rates (e.g. 3.70% on a 3-year fixed versus 2.79%), but given the risk and relative ease of approval, the pricing is quite reasonable.

“I think the opportunities are very good for companies like us and Equitable and Home Trust,” Equity Financial Trust CEO Nick Kyprianou told CMT.

“Equity focuses exclusively on mortgage brokers, and self-employed borrowers are a large part of our business.”

“I think there have been many changes and there are more changes to come. I think brokers should be building strong relationships with companies like us because we are the companies that will be supporting mortgage brokers over the long term.”

Moor adds, “The changes in policies at some of the lenders, on balance, does seem to position Equitable Trust favourably. We have a strong interest and belief in lending to BFS borrowers – and believe that it is vital to the Canadian economy that these entrepreneurial individuals have good access to the mortgage market.”

Equitable says it’s seeing “a lot of interest” in its 85% LTV BFS product and expects that interest to continue with “fewer competitors focused on the space.”

Credit Unions are also filling some of the void. Toronto-based Meridian Credit Union is a good example. In many cases, Meridian levies no rate surcharges or insurance premiums for “non-income qualified” income financing up to 75-80% LTV. Some income docs are required, however. (Here’s a related CMP story.)

Consumer Note:  Despite tighter guidelines, uninsured stated income (or “equity”) mortgages are still available from prime lenders in the 50-75% LTV range. And you can still get near-best rates, depending on your business history, credit, assets, loan-to-value, etc. This is a case where a mortgage planner is absolutely essential for comparing all the terms from different lenders.

Prime lenders also still offer insured stated-income financing with only 10% down. The challenge is, lenders and insurers are applying more scrutiny to these applications than in the past. If you think you can state any income that strikes your fancy, just to get approved, you may be sadly disappointed.

Rob McLister, CMT

Last modified: April 26, 2017