In an effort to tighten lender practices in the Canadian mortgage market and help further buffer the country’s financial institutions from a meltdown like that experienced in the U.S., the federal government is developing some stringent guidelines for lenders to follow. One result of the most recent initiative might be that it’ll be harder for the self-employed – who make up more than 15 percent of the Canadian workforce to qualify for mortgages.
Reviewing the Draft
On April 14, 2014, the Office of the Superintendent of Financial Institutions Canada (OSFI) released the draft guidelines for B-21. It’s a follow-up to the OSFI’s B-20 Residential Mortgage Underwriting Practices and Procedures guideline released in 2012.
Ed note: Need to get up to speed on how B20 affected the market? Check out how these mortgage restrictions could affect your ability to buy.
“With Guidelines B-20 and B-21, once finalized, OSFI is making clear its expectations for both lenders and insurers operating in the housing market. The industry’s adherence to these principles will contribute to the continued stability of the market,” said OSFI Superintendent Julie Dickson in announcing that the draft of B-21 would be available online for review until May 23.
One of those expectations is that lenders will make less “exceptions” for borrowers who don’t immediately meet the lending institutions’ borrowing criteria.
A Personal Case Study
For most of my career, I’ve been a self-employed freelance writer and editor. The job has many perks. For one, I really am my own boss and can decide which projects to take on, and which to decline. And, come tax time, I can legitimately claim a variety of work-related expenses, including a percentage of my utility bills, car expenses, meals, and my computer, which all go towards lowering my taxable income. That’s great news when it comes time to tally up the amount of tax I have to pay.
It’s not so great when a banker or mortgage broker takes a look at my financial history and calculates how much of a mortgage I qualify for. Luckily, for most of our married life my wife had a well-paying corporate job. Whenever we’ve applied for a mortgage, she’s been the primary borrower and my info was added on almost as an after thought.
Unfortunately, a recent wave of layoffs at her former employer meant she’s joined the ranks of the unemployed. She’s going to take the opportunity to launch her own business. (If anyone’s looking for a great interior decorator, she’s got a fantastic eye for design!)
In short, we’re a bit concerned about what will happen when it comes time to renew our mortgage.
The Full Impact of B-21: Too Soon to Tell
Given that B-21 is still in its draft stage, it’s too early to tell how it will really pan out.
One mortgage insurer we contacted for comment said they’re currently “reviewing the new guidelines and submitting our comments to OSFI so we are not in a position to make any comments at this time.”
Not everyone is so reserved. The Canadian Mortgage Trends blog wrote under the headline, B21. Here at last: “B-21 is simple, practical and sound policy, and most of the guidelines have already been adopted by lenders and insurers.”
Alternative Options For Self-Employed Mortgage Qualification
These restrictions only apply to high-ratio mortgages where the borrower has less than 20 percent available for a down payment. So if you’re self-employed and are able make a larger down payment, you’ll escape a degree of scrutiny.
Of course, in blazing hot housing markets such as Vancouver and Toronto, that’s easier said than done. But one way to help cobble together that down payment is to borrow from your RRSPs. First-time homebuyers can withdraw up to $25,000 each (so $50,000 combined for a couple) under the federal Home Buyers’ Plan.