When you own your own business, you still might want to do things like own your own home. Imagine that! Or, purchase a location for your business instead of renting. But having an unstable income makes property ownership a lot more complicated.
Here we take a look at the major issues facing business owners when it comes to getting a mortgage and ways you can get around them.
Issue number one: Landing a Mortgage
Getting a lender interested in granting you a mortgage can be a challenge when you’re self employed. That’s mainly because lenders look to pay stubs to confirm your income. As a self employed person myself, I have no pay stubs!
Instead, companies look to your Notice of Assessment from Revenue Canada. These often come in the summer, months after you’ve filed your previous year’s taxes. Bottom line: if you’re behind on your taxes, you haven’t been self employed for three years, or you dramatically underpay yourself to keep the business afloat, or you have many business expenses that dramatically lower your taxable income, this could be a problem.
Many entrepreneurs, as a result, need to work with a mortgage broker who can secure them a mortgage as a higher risk borrower, which comes with corresponding higher interest rates.
- Check out Melanie’s post from Monday for some great ideas on how to lower your risk to become a more ‘desirable’ mortgage customer.
- Get your taxes in order and collect your Notices of Assessment for 2-3 years back.
Issue number two: Getting Insurance
When I bought my first home more than a decade ago, we didn’t even bother applying for mortgage insurance — as our down payment was less than 20 per cent of the house’s value — through the Canadian Mortgage and Housing Corporation (CMHC). Instead, my partner and I had to get a personal loan with a family member to make up that down payment difference!
Times have changed. CMHC introduced a self employment insurance program in 2007. You still need to have two years of proven income, and the insurance rate is higher than that paid by traditionally employed people. (In the end, it might be cheaper to get that family loan!) Not everyone qualifies for this, but it helps if you have a good credit rating and can demonstrate years of solid income.
- Deal with outstanding credit card and other debt and make sure your credit rating is in good shape.
- Check out these ideas on how to improve your credit score.
Issue number three: What Mortgage is Right?
The perennial debate between fixed and variable rate mortgages is even more pressing for entrepreneurs.
Over time, and certainly in the short term, variable rates will save you money. Having a low rate particularly early on in a mortgage, when you owe the most, will save you big bucks.
However, when rates rise, so do your payments. If you’re tight for cash and operating on a precise budget, this could throw things way off. And since rates are so very low right now, we know that eventually they will rise. Depending on the world economic climate, that could be in just a few months, or it could take years for rates to climb a notable amount.
Meanwhile, when you have a fixed rate mortgage, you’re often paying a higher interest rate. But that higher rate acts like an insurance policy: when you sign on for a set term, say five years, you know you’re not going to have to pay more. Many are saying at these low rates, locking in now is a great idea. This is attractive for entrepreneurs who want to know how much their expenses are: no surprises.
- Crunch some numbers and see how much risk you can tolerate with regards to a variable rate mortgage.
- If you do consider variable, choose a higher monthly payment so when the rates do inevitably rise, your payments won’t change (plus you’ll have paid down extra on your principle in the meantime).