Eight months after COVID hundreds of thousands of Canadians are still out of work. The pandemic and its related business restrictions have totalled incomes and erased livelihoods.
That's got many unemployed/underemployed homeowners thinking about starting their own business. But in many cases, they’re not sure how to fund it.
The money needed to turn entrepreneurial dreams into a reality can seem hard to come by if you don’t have a job or a sufficient credit line. Most lenders require proof of income for new financing. But not all. (More on that in a minute.)
Fortunately, unemployed Canadians with considerable home equity have plenty of options to fund a new business. Here’s a quick look at some of them.
The Easy Option
For homeowners with ample equity and an existing home equity line of credit (HELOC), that’s the ticket. HELOCs provide easily accessible capital with low payments.
But tapping a credit line to fund a start-up business comes with risks:
- If your business is a bust, and you tap your whole credit line, and you can’t make your minimum monthly HELOC payments, you could lose your home
- It could take years to pay your HELOC off—and in the meantime, interest costs could spike (however unlikely that may seem today)
The pros of HELOC funding are:
- low cost
- Interest-only HELOC rates are in the 2.95%-range
- At today’s rates, that’s about $244 a month for every $100,000 you borrow
- You can pay down the principal whenever your business kicks off extra cash flow.
Mortgages for the Unemployed
For folks without a HELOC, getting one without provable income is difficult.
Fortunately, mortgage financing is still an option. The problem is, mainstream lenders generally want to see proof that you have income coming in to service the mortgage.
If you’re an unemployed homeowner and need funds to get a business off the ground, you've got to think non-mainstream. That's where lenders like Fisgard come in.
Fisgard is a big, reputable mortgage investment corporation (MIC). It recently launched a new mortgage called the “Epic Equity Program.”
As long as a borrower has a 580+ credit score, sufficient equity and a marketable owner-occupied property, Fisgard doesn’t require proof of income.
It lends up to 65% of appraised value for properties up to $1 million. They also consider properties over $1 million on a case-by-case basis.
First mortgage rates start at 7.49% to 7.99% with no renewal fees. And one- or two-year terms are available.
Those rates will sound steep to anyone used to bank rates, but without proof of income, risk goes up and Fisgard must cover itself. The truth is, these are some of the lowest pure equity mortgage rates in Canada.
Monthly payments can be amortized or interest-only—e.g., as low as $615 per $100,000 borrowed.
Fisgard will even consider interest reserves. In other words, it’ll consider loaning extra money to well-qualified borrowers to cover the mortgage payments. That helps the borrower minimize monthly obligations when their business is getting off the ground and has no revenue.
There are no lender fees, but you must use a broker, so they’ll probably charge you around 1% (which can also be built into the mortgage so that there’s no out-of-pocket expense).
Find a mortgage broker
Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.
Here at RATESDOTCA, we compare rates from the best Canadian mortgage brokers, major banks and dozens of smaller competitors.
The End Game
Lenders like Fisgard aren’t meant to be long-term solutions. “The deal begins with the end in mind,” Hali Noble, Senior Vice President of Fisgard, likes to say. She recommends having a solid plan to exit this higher-cost financing, and to have a contingency plan in case you need to shutter the business and become an employee again.
Once a business starts generating decent cash flow, however, then you can build an income track record and subsequently slash your borrowing costs.
After you get a year of income on your tax return, you can refinance with an institutional lender like Equitable Bank or Home Trust. If your credit is solid, you can get rates as low as 2.99% plus a 1% fee (which can be baked into the mortgage).
- RATESDOTCA Tip: Equitable Bank will allow borrowers with a revenue-generating business and as little as 6 months of income proof to refinance into a more cost-effective non-prime mortgage, at up to 65-70% loan-to-value.
Once you have two years of income under your belt, then you have access to prime mortgage lenders with rates under 2% (as of today). Equitable Bank, for example, allows qualifying non-prime borrowers to switch into prime mortgages at maturity with no refinance fees. That assumes you maintain pristine credit, have a reasonable debt load and meet other standard guidelines.
- RATESDOTCA Tip: CMHC has a program that allows newly self-employed to qualify for default insured financing under certain circumstances. If your business is profitable, talk to a broker to see if you qualify. The rate savings can be significant if you do.
For homeowners with sufficient equity, starting a new business is still a viable option, even if they don’t have a job. But not only does one require a rock-solid business plan and a risk tolerant mindset, he/she needs to accept higher borrowing costs for a year or two...at least until the business is a roaring success.