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Self-Employed Mortgages in Canada

Learn how to get a mortgage if you’re self-employed.

Are mortgages for the self-employed different than a regular mortgage?

The term self-employed mortgage refers to a mortgage taken out by a self-employed applicant, as opposed to being an entirely separate type of mortgage product.

The biggest difference is that those who are self-employed will have to provide different documentation during the mortgage application and therefore may have a different mortgage experience.

Self-employed mortgage basics

Self-employment rates have risen steadily over the years, with close to 15% of Canadians now identifying as self-employed. While this means the demographic is composed of millions of people, it can still be challenging for those who are self-employed to obtain a mortgage.

Being self-employed is a broad term that encompasses those who operate a business, perform freelance work or run a farm.

When it comes to getting a mortgage, Canadians in these roles face some unique challenges compared to those in more conventional salaried positions. Providing sufficient proof of income required by lenders can be one of the biggest hurdles.

How to get approved for a self-employed mortgage

Because getting a mortgage while self-employed can be difficult, it’s important to take the steps that maximize your chances of approval. These include:

  • Maintain a good personal credit score: Whether you’re self-employed or not, your credit score plays a significant role in determining whether you are approved for a mortgage. To maintain a good credit score, make sure you never surpass your credit limit, keep debts from going to collections and always pay bills, like phone, rent and loans, on time. Keeping your credit score high will make you more attractive to lenders and can help you qualify for lower interest rates.
  • Develop a self-employment history: Banks will be more likely to lend to you if you have a well-maintained financial track record of self-employment. It’s advised to be self-employed for at least two years before applying for a mortgage, as this duration provides enough time for you to demonstrate a consistent source of income.
  • Maintain accurate tax and business records: Since most lenders will require you to have an NOA, it’s best to keep your most recent ones (up to at least three years or more). Also, having accurate and organized business records will show that you’re responsible and give the bank more reason to trust in your ability to pay off a mortgage.

Supporting documentation to get a self-employed mortgage

Most mortgage lenders require your most recent Notice of Assessment (NOA), and often require information from the past three years, as well as proof of income, at a minimum.

A mortgage lender may also require you to have any or all of the following additional documentation:

  • Financial statements for your business.
  • Business licence and proof that you’re a principal owner of the business.
  • Proof that your HST and/or GST is paid in full.
  • Contracts showing expected revenue for the coming years.
  • Your personal and business credit scores.
  • A copy of your business or GST licence, or an Article of Incorporation showing you are licensed.
  • Proof that your down payment has not been gifted.

Mortgage default insurance and self-employment

Mortgage default insurance is mandatory on down payments that are less than 20% of the purchase price of a home, whether you’re self-employed or not. The idea behind this insurance is to protect lenders in the event a borrower stops making payments and/or defaults on their loan. It won’t cover your mortgage payment if you’re unable to pay or in the event of death.

This is what’s important to know about mortgage insurance:

  • The insurance protects the mortgage lending institution only, not the borrower.
  • The insurance is not available for residential homes purchased for more than $1 million, meaning a minimum 20% down payment is required.
  • The premium is calculated as a percentage of the amount borrowed.
  • 25 years is the maximum amortization for insured mortgages.
  • A higher minimum down payment is required for the purchase price of a home between $500,000 to $999,999. Of the first $500,000, the minimum down payment is 5%, and 10% of the remaining amount.

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What to know about mortgages if you’re recently self-employed

If you’re recently (less than two years) self-employed, you might have a difficult time getting approved for a mortgage. It’s not impossible, though.

According to CMHC, there are some additional steps you can take to increase the likelihood of receiving mortgage approval. These include:

  • Acquiring an established business
  • Maintaining sufficient cash reserves
  • Demonstrating predicable earnings
  • Cataloguing previous training and education
  • Showcasing a demonstrated history of managing credit

Having access to further documentation that verifies your income will depend on the nature of your self-employment and financial circumstances. Having this additional documentation will also help boost the lender’s decision to approve:

  • Previous employment documentation based on type of income
  • Recent account statements
  • Business documentation
  • Signed contracts

Frequently asked questions about self-employed mortgages.

Will the mortgage rate be higher because I’m self-employed?

Lenders prefer to minimize risk when supplying loans and being self-employed is often perceived by lenders as posing a high level of risk. So yes, mortgage rates tend to be higher for self-employed individuals.

However, many of the traditional factors that contribute to determining your mortgage rate still apply. If you’re able to demonstrate the ability to make monthly payments and limit debt, and can provide a large down payment, then you may be able to qualify for a lower mortgage rate.

Can I apply for a second mortgage if I’m self-employed?

Yes! As a self-employed borrower, you can apply for a second, and even third mortgage. You can also apply for refinancing.

You can use the money to consolidate other debts, such as credit cards, car loans and student loans.

What happens if I can’t get a mortgage?

If you don’t qualify for a mortgage through a bank, an alternative option is to speak to a private lender.

Because some self-employed individuals will deduct expenses from their income taxes, it can look to a bank like they have a lower income than they actual do. Even with proof of income, established savings and a good credit score, some banks may be wary when someone appears to have low income relative to the cost of the home they’re purchasing.

On the other hand, private lenders are primarily concerned with a borrower’s debt-to-income ratio. That means the lender will add your deductions back to your net income, making it appear higher.

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