How to Refinance Your Mortgage if You're Self-Employed

Refinancing your mortgage if self-employed can involve extra work and challenges compared to refinancing for people who are traditionally employed. However, overcoming these challenges is possible, and doing so can result in substantial benefits.

According to recent data from Statistics Canada, roughly 15% of Canadians are self-employed. If you are one of these people, you might have questions about your self-employed mortgage refinancing options.

Refinancing your mortgage can result in lower interest rates, reduced monthly payments, and access to home equity for your other financial goals.

This article aims to outline and explain the refinancing process with clear and actionable advice tailored to self-employed Canadians.

What is Mortgage Refinancing?

Mortgage refinancing is the process of replacing your current mortgage with a new one that has a different set of terms. This can include a different interest rate, a change in payment frequency, and other conditions.

People often choose to refinance when current interest rates are lower than when they first obtained their mortgage. However, there are other reasons to consider refinancing as well.

Benefits of Mortgage Refinancing

These four benefits are key reasons why many homeowners choose to refinance their mortgage:

Lower interest rates: One of the primary reasons for refinancing a home loan is to secure lower interest rates. This can reduce your monthly payments and save you money on total interest over the life of the loan.

Get a shorter loan term: Opting for a shorter payoff term may increase your monthly payments, but it also allows you can pay off your mortgage faster and save on interest.

Debt consolidation: Refinancing allows borrowers to consolidate high-interest debts, such as credit cards or personal loans, into a single, lower-interest mortgage payment.

Access your home equity: Refinancing can effectively leverage your home equity for major expenses, such as home renovations or education. As a business owner, you might also use this equity to reinvest in your business.

Refinancing for Self-Employed Individuals:
Why is it Different?

There are many unique challenges of self-employed refinancing compared to when people are traditionally employed. Awareness of these challenges can help you prepare and ensure a smoother refinancing process.

To refinance your mortgage, you typically need income verification, which can be challenging if you're self-employed. This is mainly due to irregular income streams and the complex documentation required.

Although self-employment is becoming more common in Canada, some lenders are slow to adjust to this type of employment. Many still rely on traditional lending criteria that favour standard employment, viewing it as more secure and easier to evaluate. However, this perspective is slowly changing, and self-employed borrowers can obtain favourable terms by providing the required documentation.

Below, we explore four of the most prominent challenges of refinancing a mortgage for self-employed people, and strategic insights for overcoming them, including:

• income stability
• income documentation
• business expenses and tax write-offs
• self-employed income verification types

Here is an explanation of each:

1. Proof of Income Stability

When self-employed, your income may be irregular and less predictable than that of traditionally employed people. This income instability can be seen as a risk by lenders who favour stability and predictability, making refinancing more challenging.

With income stability often comes irregular cash flow. If you're self-employed, your cash flow is likely to be variable. It's common for self-employed individuals to experience fluctuations in income, with earnings in some months being higher than others. For instance, certain seasons and months may be more profitable than others. If you do project-based work, this can also mean your cash flow varies throughout the year.

Relying on client payments can lead to delays, also resulting in income fluctuations.

Perceived Risk: Lenders typically consider irregular income a higher risk, assuming self-employed individuals may experience periods of low or no income. They typically prefer borrowers with steady income streams.

As a result, self-employed individuals may experience more stringent requirements and closer scrutiny of their financial documents during refinancing.

Proving Consistency: To address lenders' concerns about high-risk borrowers, you can provide a stable and sufficient income history. This typically involves providing several years of financial records to show a consistent earnings track record. Evidence of long-term contracts or retainer agreements with clients can also help prove your income stability.

2. Income Documentation

It can be challenging to prove your income without a regular pay stub. While salaried employees can generally submit a few recent pay stubs and an employment letter, you'll likely need to provide a broader range of income documentation. This can be challenging if you don't have access to as many records as traditionally employed borrowers.

Lenders might request to see your bank statements to help them assess your financial health. These statements can provide proof that regular, consistent deposits occur that align with the income amounts reported on your tax returns and financial statements.

While irregular deposits might have a legitimate explanation, they can raise concerns during the approval process. However, don't panic. These challenges are manageable, and additional documentation can help address them effectively.

3. Business Expenses and Tax Write-Offs

While writing off applicable business expenses may be an advantage of self-employment, it can present challenges when refinancing.

Business expenses and tax write-offs can reduce taxable income, but can also affect mortgage approval for self-employed people because of their impact on net income.

Lenders focus on net income, which can be significantly lower for self-employed individuals after deductions. Consequently, a lower net income can reduce your borrowing capacity.

4. Fewer Methods to Verify Self-Employed Income

The final reason why verifying income can be more challenging if you're self-employed is that you have fewer methods to do so. Self-employed people often have fewer documentable sources of income.

Traditionally employed homeowners tend to receive pay stubs and T4s. This can make refinancing a mortgage more straightforward when they need to provide proof of their income.

Self-Employed Income Verification Types

Lenders use different methods to verify self-employed income. Each has implications for mortgage rates and down payment requirements.

Below, we outline three primary types of self-employed income verificationtraditional, non-traditional, and stated incomeand the documents you can use to support each.

1. Traditional Income Confirmation

Traditional income confirmation is often the preferred method for mortgage approvals for self-employed individuals. If you can verify your income through your personal tax returns, it often results in the lowest rates and smallest down payments when refinancing.

However, this method requires the most detailed and accurate tax filings.

2. Non-Traditional Income Confirmation

If you are unable to provide traditional income confirmation when you refinance your mortgage, non-traditional income confirmation options might be a better option.

This involves using your business financials and bank statements to verify your income.

Non-traditional income confirmation usually results in a slightly higher mortgage rate and down payment. In return, it offers flexibility if your tax returns don't fully reflect your income.

We'll provide more information about the necessary business financial documents and statements later.

3. Stated Income

If you cannot verify your income or choose not to, the stated income method is a refinancing option available through B lenders and private lenders for self-employed individuals.

These mortgages typically have the highest interest rates and down payments. If income confirmation is not available, this can be a viable option to pursue.

Proof of Self-Employment Income

Depending on the type of income verification you use, certain documents will be required for proof during refinancing. Adequate proof of self-employment income can help you secure the best mortgage rates and lowest down payments if you're self-employed.

Here is some detailed information about the documents you can use to provide proof of income:

Business Financial Statements and Other Documentation
for Self-Employed Mortgage Refinancing

Along with a variety of business financial statements, lenders may also ask for additional documentation before moving forward.

Here is a list of documentation types your lender might request as they process your application:

Important Business Financial Statements: A set of business financial statements typically includes the following four documents:

• balance sheet
• cash-flow statement
• statement of retained earnings
• income statement

Each of these statements are important during refinancing, as they demonstrate the amount of income you earn and the regularity at which you receive it.

Bank Statements Showing Consistent Income Deposits: Your bank statements record all transactions in an account, including receipts and payments, during a certain period. Ensure you have access to these statements when you're refinancing your mortgage.

Confirm all information in these statements is accurate and legitimate. Be prepared to explain any large or irregular deposits.

Contracts Showing Expected Revenue for the Coming Years: If possible, gather any contracts demonstrating stable income over the next six to 12 months. This documentation can build a lender's confidence in your ability to manage mortgage payments.

A revenue contract is an agreement with a client or customer that describes the terms of regular business dealings. It typically outlines the services or products you will provide and the compensation you will receive in return.

If possible, include a variety of contracts to show diversified income sources.

Proof of HST and/or GST Payments: Receipts, returns, or statements filed with the Canada Revenue Agency (CRA) can be used to prove HST (Harmonized Sales Tax) and GST (Goods and Services Tax) payments during the refinancing process.

These are evidence of the tax you collected when you redeemed the rebate or remitted it to your business.

To further validate your income, it also shows that your business complies with tax regulations, operates legally, and generates sufficient revenue to meet tax obligations.

Notices of Assessment (NOAs) from the CRA: Most lenders require at least two, but sometimes up to three years of personal and business tax returns plus NOAs from the CRA (Freedom Capital, 2022).

NOAs are documents from the CRA after they review and verify your income tax return. They show the total taxable income, tax credits, tax deductions, and the amount you owe or your tax refund.

Proof of Principle Business Ownership: Lenders also verify that you have a certain stake in the business that generates your income.

Providing proof of this can confirm your role and responsibility within the company, demonstrating that you have the authority and stability to support your mortgage refinancing.

This proof can be provided with any documents that designate you as a principal owner of the business, including:

• partnership agreements
• business licences
• GST licences

Personal Identification: For all borrowers, whether self-employed or not, lenders require valid forms of identification, such as a driver's licence or a passport.

Credit Report: Some lenders may also request to see your credit report, so it's wise to have this available when meeting with a mortgage lender. They use this to assess your creditworthiness and how effectively you manage your credit.

Maintain a good credit score by monitoring it regularly and keeping your credit utilization rate to 30% or less. This is a best practice for maintaining a healthy credit profile.

Debt Information: Any outstanding debt affects your debt-to-income (DTI) ratio, so your lender might ask for related documentation. This includes a record of outstanding debt, credit card balances, personal loans, and personal mortgages.

The maximum DTI most Canadian conventional mortgage lenders accept is 43%, but a lower ratio is typically preferred. A DTI of 36% or less is ideal. Different lenders may have varying criteria and may prefer a lower figure.

Requirements for Self-Employed Mortgages

Now that you know more about the documents you need for different types of self-employed income verification, we'll move on to unique requirements from various lenders.

Meeting these requirements can seem overwhelming, but they are worthwhile if they result in refinancing your mortgage with more favourable terms.

Below are some different requirements for self-employed mortgage refinance processes of big banks, B lenders, and private lenders to help you prepare.

1. Big Banks (A Lender Mortgages)

Big banks typically have the most stringent self-employed mortgage refinance requirements.

Here is an overview of what four of Canada's biggest banks require:

Royal Bank of Canada (RBC)

RBC Self-Employed Mortgages have the following features and requirements:

• Borrow up to 80% of the purchase price or property value with no default insurance if the Notice of Assessment shows sufficient income.
• Borrow up to 95% with default insurance if Notice of Assessment shows sufficient income.
• You can access additional income from your business with a good credit history to:
  • Finance up to 80% of the appraised value of your home when refinancing.
  • Finance up to 90% of the value of a home being purchased.
• If you finance up to 65% of the value of your home, no additional fees or insurance premiums are required.
• Default insurance is necessary for financing between 65% and 90% of the value of your home.

Required Documentation

• your most recent Notice of Assessment
• documentation confirming self-employed status
• additional documentation may be required based on the application structure, contact RBC for a complete list. (Royal Bank of Canada (RBC), n.d.)

Toronto-Dominion Bank (TD)

TD Bank does not advertise a specific self-employed mortgage. However, they do outline what to bring to a mortgage pre-approval meeting, including specific instructions for the self-employed.

Here are some of their mortgage approval requirements that apply to self-employed individuals:

• current address
• previous address (if current address is less than three years)
• previous employment information
• sources of verifiable income
• if self-employed, the last two years' Notice of Assessments from your Income Tax return
• value of properties, automobiles, investments, and savings
• most recent statements for mortgages, loans, and lines of credit
• most recent credit card statements
• estimated value of your home
• housing expenses
• financial information for your co-borrower, if applicable

Scotiabank

Scotiabank provides a helpful mortgage approval checklist with specific requirements for self-employed Canadians. Here is an overview of the requirements they outline:

There are five categories of requirements needed by Scotiabank for self-employed people including:

Business Documentation (One of the Following):

• valid business registration or licence and most recent annual return (if applicable)
• financial statements for the last two years, signed off by an approved accountant or in good standing with the relevant supervisory board
• most recent account statement for an active business/commercial bank account (Scotiabank or other)
• certification of incorporation/Articles of Association

Income Evidence Documents (One of the Following):

• income tax returns for the last two years
• audited financial statements for the last two years
• financial statements for the previous two years, signed off by an approved accountant or in good standing with the relevant supervisory board, and six months' bank statements
• any official document issued by the local government indicating income

Credit Approval Documentation:

• source of down payment: account statement, letter signed by donor & borrower (if a gift)
• proof of assets/liabilities in the name of the borrower
• proof of loan purpose: sale or purchase agreement, confirmation of debts to be settled, estimates/approvals for home improvements, statement of works, or other supporting documents
• bank references and professional references for temporary residents
• credit bureau report (if applicable)

Additional Credit Approval Documents (If Applicable):

• leasehold lands: lease rent receipt, lease agreement showing expiry for greater than or equal to five years after mortgage maturity
• mortgage deed, certificate of title, or current copy of the land register
• approval from a regional corporation for subdivision/development
• annual property tax statement and insurance
• for apartments/townhouses/condominiums: strata insurance, evidence of up-to-date payment of maintenance fees, home inspection/current appraisal ordered by Scotiabank, most recent water bill, evidence of clear title

Closing and Disbursement Documentation:

• leasehold lands: lease agreement shows an expiration date of greater than or equal to five years after mortgage maturity
• property insurance: fire and all perils insurance assigned with coverage of the lesser of the mortgage amount or full replacement value of the structure
• occupancy certificate (if applicable)
• for unfinished developments: certificate of practical completion (if applicable) (Scotiabank, n.d.)

Bank of Montreal (BMO)

Bank of Montreal (BMO) recently introduced aSelf-Employed Homeowner Mortgage (SEHM) program for self-employed and commission-based income customers.

The following are some of their requirements for self-employed mortgage approvals:

• last two years of tax returns (T1 General) and the corresponding Notice of Assessment

One of the Following:

• statement of business activities for the respective tax years
• audited financial statements for the business for the respective tax years
• financial statements accompanied by a Review Engagement Report signed by a practicing accountant
• Notice to Reader: financial statements prepared by a professional accredited accountant for the respective tax years

2. B Lenders (Alternative Mortgages)

Mortgages from traditional banks, like the ones listed above, are considered A lender mortgages. Non-traditional banks (including credit unions) are considered B lenders.

These lenders tend to be more flexible to self-employed borrowers by accepting non-traditional forms of income verification. The main consideration is that B lenders tend to require larger down payments and typically have slightly higher interest rates than A lenders.

Some popular B lenders for self-employed mortgages in Canada include True North Mortgage, Equitable Bank, Home Capital, MCAP, and Merix Financial.

Like traditional banks, they have their own requirements, but tend to be more flexible than A lenders. Consider this offer from True North Mortgage tailored to self-employed people to demonstrate their increased flexibility: A typical A lender mortgage could require a 35% down payment to access lending options without providing traditional third-party income validation.

However, True North Mortgage has an in-lender (THINK Financial) through which it can offer this same type of mortgage for as little as 10% down through Sagen's Business for Self (Alt. A) program.

There are still requirements, such as ensuring that at least 5% of your down payment comes from your own resources, but this offers many self-employed people the means to qualify for a mortgage that works for them (Sagen, 2023).

3. Private Lenders

Mortgages from sources other than a financial institution are considered private. Private mortgage lenders only work with mortgage brokers.

Most private lenders accept stated income without verification, charge higher interest rates, and require larger down payments.

This can be a valuable alternative to A and B lenders for people with complicated incomes, including irregular self-employment or those transitioning between employment types.

CMHC Self-Employed Mortgage Insurance

It's important to understand self-employed mortgage insurance within the context of refinancing and how it can help you secure more favourable mortgage terms.

Fortunately, the Canada Mortgage and Housing Corporation (CMHC) offers mortgage loan insurance tailored to self-employed individuals.

This insurance can make it easier to secure a mortgage by reducing lenders' risk. However, it comes with specific eligibility requirements and costs.

Since 2018, the CMHC has eased its self-employed mortgage loan insurance qualification criteria. They now consider a wider range of factors in lending decisions, helping more people acquire mortgage insurance.

Some of the additional criteria they consider include:

• predictable earnings
• sufficient cash reserves
• training and education
• credit history (Equitable Bank, 2018)

Conclusion: Mortgage Refinancing for the Self-Employed

With the right documents, strategies to address the challenges of refinancing, and an understanding of how the process varies between different types of mortgage lenders, you now have a better understanding of successfully refinancing your mortgage as a self-employed individual.

The information and mortgage refinancing tips for self-employed borrowers provided in this post give you a significant advantage as you begin the refinancing process.

With this knowledge, you're better prepared to find a suitable mortgage, even if proving your income is challenging. By preparing carefully and organizing relevant documentation, you improve your chance of success in the refinancing process. For further benefits, you can use Everyrate.ca to compare mortgage rates and find the best lender based on your unique situation.

Summary Checklist for Self-Employed Mortgage Refinancing

• Income Documentation
• Credit Score: maintain and monitor regularly
• Debt-to-Income Ratio: keep it low
• Assets: document and provide proof
• Equity: ensure significant equity in the home
• Shop Around: compare lenders and rates
• Prepare for Scrutiny: be ready for a detailed review

References

Bank of Montreal (BMO). (2022). Home Financing Checklist.https://www.bmo.com/pdf/Home-Financing-Checklist-v0.8-EN.pdf Equitable Bank. (2018). Broker Checklist Purchase.https://www.equitablebank.ca/docs/default-source/default-document-library/eqb_cbs_broker_checklist_purchase_en.pdf?sfvrsn=4794f605_4 George, D. (2021). 4 reasons your debt-to-income ratio is so important. Motley Fool.https://www.fool.com/the-ascent/personal-finance/articles/4-reasons-your-debt-to-income-ratio-is-so-important/ Freedom Capital. (n.d.). Self Employed Mortgage Documents Requirements in Canada.https://www.freedomcapital.com/self-employed-mortgage-documents-requirements-canada/ Royal Bank of Canada (RBC). (n.d.). RBC Self-Employed Mortgage. https://www.rbcroyalbank.com/mortgages/self-employed-mortgage.html Sagen. (2023). Business for Self (Alt. A).https://www.sagen.ca/products-and-services/business-for-self/ Scotiabank. (n.d.). Mortgage Application Checklist.https://tc.scotiabank.com/personal/borrowing/mortgage-checklist.html TD Bank. (n.d.). Mortgage Pre-Approval. https://www.td.com/ca/en/personal-banking/products/mortgages/first-time-home-buyer/pre-approval True North Mortgage. (2024). Mortgages for Self-Employed.https://www.truenorthmortgage.ca/mortgage-solutions/business-for-self