Proving income can discriminate against people starting a business and new Canadians
OTTAWA — The national housing agency is exploring ways to make it easier for entrepreneurs and new immigrants to buy a home by cutting some of the red tape required to prove they can afford to pay the mortgage.
“Right now, under our mortgage insurance policies, you have to be able to document income to get mortgage insurance, to a level of specificity that discriminates against new Canadians, because they can’t do that,” Evan Siddall, the CEO of the Canada Mortgage and Housing Corp., said in a wide-ranging interview with The Canadian Press.
“It discriminates against entrepreneurs, as well, because they can’t prove their income as well, so we’re looking at our own policies to try and make sure that there is more equity in our mortgage insurance programs,” he said.
Anyone who wants to buy a home in Canada without a down payment of at least 20 per cent of the purchase price is usually required to get mortgage loan insurance from the CMHC, which requires a smaller down payment of five per cent on a home worth up to $500,000.
A 10-per-cent down payment is required for the portion of the price over $500,000, with $1 million being the maximum property value allowed.
The mortgage insurance comes with a premium, which the lender will then pass on to the person buying the home.
Borrowers need to satisfy lenders they will be able to make their mortgage payments, which usually means providing proof of employment and a few pay stubs. But that can be tricky for people who just started their own business.
It can also be a barrier to those whose employment history has gaps for other reasons, such as having recently immigrated to Canada.
People who are self-employed, for example, usually need to provide notices of assessment for the previous two years. Their income is determined by averaging those two years, although the most recent year can be used if it has increased annually for at least four years.
They also need to have been doing the same type of work for at least two years.
Dan Kelly, president of the Canadian Federation of Independent Business, said more flexibility would be welcome, especially for startups.
“If one starts a business or is self-employed, the lines between their personal and business finances are often quite blurry,” said Kelly.
“Often, their personal assets are required to get financing for the business. But then they also have a challenge getting financing on the personal side, because they don’t have the nice, clean letter of offer from an employer that is often quite convincing in these situations,” he said.
Any relaxation of the rules would naturally increase the risk. So Siddall said the agency is looking at how to manage that, including different ways to document income, and higher premiums.
“Can we charge for that risk? Better to charge that risk than not to make it available,” he said.
Jack Fiorillo, a broker with TMG The Mortgage Group in Woodbridge, Ont., said he expects the CMHC to be fairly conservative on this front.
“It will be a very small sandbox that CMHC will play in, probably at the beginning, and then maybe if once their risk appetite increases, maybe they can expand that box,” said Fiorillo.
He said he expects the potential change to make it easier for a relatively small number of self-employed people to get a mortgage, and they will likely have to pay higher interest rates.
The CMHC said it has been compiling data on how many would-be homeowners have their mortgage applications rejected for these reasons, but cannot disclose those numbers right now because it is based on conversations with commercial lenders.
“We are still doing research and development to move this forward,” CMHC spokesman Jonathan Rotondo said in an email.
Siddall said the Crown corporation has raised the idea with its board and expects to announce something within the next six months.