When it comes to understanding a mortgage for a self employed individual it is critical to recognize that the core principles of the mortgage remain the same whether you are self-employed or employed as a traditional employee. The process of securing a mortgage for a self-employed individual can be a bit different due to the nature of their income. Unlike a traditional employee who receives a steady pay cheque, self-employed workers typically experience variable income streams that can fluctuate widely from month to month or year to year. This can make it slightly more challenging for a lender to assess the clients' ability to repay the loan.  In order to obtain financing for a self-employed individual, the job of a Mortgage Broker is to work with the client to gauge how best to demonstrate their financial stability and reliability to lenders. Every lender will have different policies on which type of self-employed clients they will work with and how they assess the client's income as presented. This is why many self-employed individuals may find it challenging to obtain a mortgage, even from their bank they have dealt with for many years. Many times there will be additional documentation required beyond the standard requests for someone that is self-employed. Lenders will often look for documentation such as the companies financials, 2 to 3 years of tax returns with N O As, 6 to 12 months of bank statements and ownership documentation to show at least 2 years of self-employment, like the Master Business License or Articles of Incorporation for an incorporated business. The down payment required for a self-employed individual can be as little as 10% depending on the structure of the clients self-employment; however, we traditionally see a mortgage for a self-employed individual requiring a down payment of 20% due to the client's income structure. The source of the down payment is also important with a self-employed individual as lenders may not allow gifted down payment and require that the down payment be fully from the client's own resources. There are many mortgage programs available for a self-employed individual, the availability of the different programs mainly comes down to how the client pays themselves from their business. The simplest way to calculate the clients' income is by looking at the client's verifiable income; this is how much is shown on the client's tax return and in many cases it does not provide much qualifying power as their net income may be low. The reason for this is that self-employed individuals have a different way of declaring their income due to advantages provided by write-offs and other tax benefits; especially if the individual is incorporated. An individual that is incorporated or owns an incorporated business has a few options when it comes to paying themselves from the business, and may even pay themselves only enough to cover their personal expenses while electing to keep money within the business. The benefit to this is a lower taxation expense; however, the trade-off is that there may be issues qualifying for a mortgage based on the clients' income; this is where a 'stated' or 'declared' income mortgage product comes in. These mortgages may require the client to declare their income and the lender will use different methods to verify and ensure that the declared income is realistic and will provide an opportunity for the client to repay the mortgage. These mortgages may feature slightly higher interest rates and have fees; although, when compared with the tax savings, the higher interest and fees make much more sense than paying more tax to the Government. It is always recommended that clients discuss their financial situation with their accountant and financial advisor, as well as their mortgage broker; in order to structure their finances in such a way that provides the most benefit to the self-employed individual. Having professionals in each field involved in the process and providing feedback is crucial. More and more people in Canada are choosing to be self-employed and lenders are responding with different mortgage products and programs in order to provide these individuals with an opportunity to obtain financing for a dream home for them and their families. In conclusion, a mortgage for a self-employed individual is the same as a mortgage for a client that is employed in a traditional manner, the difference comes down to how the client's income can be calculated. There are different options available, however, some of these options may not be available based on the client's verifiable income. It is important that a self-employed individual work with a Mortgage Broker in order to review the different mortgage products available to them and ensure they have the most suitable option in place for them and their family. Feel free to reach out at (905) 440-5392 with any questions on self-employed mortgages or anything else mortgage related!

Let's say you have a mortgage commitment from a lender, and prior to the closing date, rates change and come down a bit. Today, we will discuss how this change in rates can potentially benefit you and save you some money in interest expense; or how a rate change can affect how much more you could potentially qualify for if you have a pre-approval with a rate hold.

Rates are rarely static with any lender and can change weekly or even daily. When you have a mortgage commitment, you are protected from rate increases as long as there are no material changes in the application prior to the closing date; however, if rates come down before closing, you may be able to take advantage of this new lower rate.

It is important to discuss any potential rate adjustments with your Mortgage Broker since every lender is different, and some allow for multiple rate adjustments on a file, and some allow only one or even none. It is also important to consider how close to closing the rate adjustment opportunity is, as if it is too close to the closing date, the lender may not have time to make the adjustment and issue new documentation for the lawyer. When dealing with a lender that only allows one rate adjustment, the decision of when to request it is to be made strategically to limit the possibility of adjusting the rate down and then watching them fall further without the ability to make another change.

Even though rates are always changing, it should not be expected to see a drastic change in rates between when you receive the mortgage commitment and the closing date; however, even a small change can make a difference in not only your interest expense over the term of your mortgage; but, also the amount of the monthly payment, which will increase your cash flow with each payment.

For our example, we will use a $500,000 mortgage amount with a 5 year fixed rate that is amortized over 25 years. The original interest rate on the mortgage commitment is 4.99% and a few weeks before closing the lender reduces their rate to 4.89% on the same term and mortgage product. Your Mortgage Broker would check with the lender if a rate adjustment, or float down, as it is known in the industry, is available and would present the following to you to see if you would like to have the rate adjustment applied.

The rate reduction would result in a payment that would be $28 lower per month and would not only save you $2,400 over the 5 year term; but, would also result in $700 more principal being paid, for a net savings of $3,100. Not to bad for a simple request from the lender.

When it comes to how a rate decrease affects a pre-approval, it isn't that it changes the pre-approval itself since the rate on the pre-approval certificate is held and in effect for 4 months; it can however change the amount that you would qualify for if you find and secure a property with an accepted offer to purchase while the lower rate is active. This can be helpful if your qualifying amount on your pre-approval is a bit lower than what is required to purchase a property in the location you are looking at; sometimes a couple extra thousand dollars is enough to get an accepted offer.

For example, let's say you have a pre-approval for a maximum purchase price of $700,000 and a rate of 4.99% held and rates come down to 4.79% while you are shopping for a property. The purchase amount that you would potentially be able to qualify for with this new rate would be $711,000, or an increase of $11,000. It is important to note that you must ensure to discuss this with your Mortgage Broker so that they can adjust qualifying based on actual amounts for the property; and of course, even with a pre-approval, a condition of financing is a must in order to protect yourself.

For many homeowners and potential homeowners, one of the first questions that comes up when shopping for a mortgage is "what is the interest rate on my mortgage?". Of course, the interest rate is important; however, even more important is the Annual Percentage Rate, or APR, since this is where you find the true cost of borrowing the principal amount of your mortgage.

Mortgage Brokers are regulated to not only inform the client of their interest rate on their mortgage; but, we also need to disclose the Annual Percentage Rate to the client in both rate format and in dollar terms as well. This ensures that clients have full clarity on the true cost of borrowing for their mortgage.

So, what is the difference between an interest rate and an Annual Percentage Rate? 

The interest rate is used to calculate the actual amount of interest you will pay on the principal of your mortgage over your term and only includes interest to be charged. It is essentially the cost of borrowing money over time. Let's say your mortgage is $500,000 and your interest rate is 5%. For simplicity, we will use a 1 year term for our examples and ignore amortization. In this case, the interest cost for this mortgage would be $25,000, which is 5% of $500,000. This calculation is simple enough and includes the interest cost; however, there are usually other costs involved with a mortgage and this is where the Annual Percentage Rate comes into play.

The Annual Percentage Rate is a broader measure of the cost of borrowing and not only includes the interest cost but also other costs and fees associated with obtaining the mortgage. These can include closing costs, lawyers' fees, tax on mortgage default insurance, and lender or broker fees on mortgages where these are applicable. Using the same example as before, let's say that closing costs and lawyers fees were $5,000. In order to calculate the APR we add the interest cost and the other fees together to get a true cost of borrowing of $30,000 or 6%.

It is important to note that the 6% calculated for the Annual Percentage Rate is not what will be used for your actual interest cost; that will be the interest rate that you agreed to with your lender, in the previous case, 5%. The Annual Percentage Rate provides a more accurate picture of what the mortgage actually costs you and annualizes the fees for full transparency.

The Annual Percentage Rate is not specific to mortgages and are also found on credit cards and other loans since those creditors also need to provide the full cost of borrowing money from them.

Paying attention to the Annual Percentage Rate when comparing mortgage products is important since ignoring it could make two similar mortgages at 5% seem like they are equal; however, if one of those lenders is charging a 1% lender fee, they are not equal at all; this is the reason why Mortgage Brokers are regulated to provide the Annual Percentage Rate to you. In fact, our regulator, the Financial Service Regulatory Authority of Ontario, pays a lot of attention to how Mortgage Brokers are disclosing this to clients and lately have been finding that some Brokers are not properly including all costs in order to present a lower Annual Percentage Rate to their clients to hide the true cost of borrowing. These findings are being met with large penalties and even the suspension or loss of the Broker's license. Always ensure that you are being made aware of the total cost of your mortgage.