As a business owner or self-employed person, I’m sure you know better than anyone else that when it comes to providing a unique product there is no cutting corners. When it comes to mortgages I feel the same way. It’s not very likely that you will receive a mortgage with a satisfactory rate unless you are keeping up your end of the bargain. That means declaring your full income (remember, no cutting corners), and focusing on the mortgage rate itself instead of the income tax savings.
Expressed in a more direct way: trying to pull a fast one by declaring a lower income will mean you will pay less in taxes, but don’t expect to the best mortgage rates out there.
DECLARE, DECLARE, DECLARE, or ADJUST YOUR RATE-PECTATIONS!
Everyday I meet more self-employed people who do not “like” to declare their full income because they keep their income tax low. But if you’re one of the thousands of people out there who would like to own a home one day, not declaring your full income is akin to playing Russian Roulette with your finances.
If you do not declare all your income, do not expect to get the lowest mortgage rates available. Claiming a lower annual income will do nothing to make a lender look favourably on you; instead, it will harm your chances of finding a great mortgage because a top lender will have to comply with the lending rules set out by the government. If you are not declaring your income, they are unable to advance you the funds.
This is where I introduce you to B lenders. “B” lenders are usually the most suitable lenders for self employed individuals. They will look at alternative sources of income including business bank statements, company financials, and sales receipts to estimate your total income. I want to emphasize reasonability. Just because they are accepting an alternative source, doesn’t mean they will accept everything.
FLEXIBILITY OF ACCEPTABLE INCOME WILL MEAN HIGHER MORTGAGE RATES
Unless you can qualify based on your reported income, using income that is not supported by your taxes will create more risk for the lender. Depending on your file’s overall risk, the lender will require a higher down payment, usually 25% or more and charge more to lend out that money. If you were in this category before, this is why you didn’t get the same rate as your employed friend who just put 5% down and bought his new condo.
THE NUMBERS DON’T LIE (PEOPLE DO!)
Any reputable mortgage broker will be happy to sit down with you and crunch some numbers. Numbers are our speciality after all, and it’s part of the services we offer clients.
If you are self-employed and thinking of buying a home, a mortgage broker can work out how much interest you would have to pay over the course of your mortgage and compare it with your tax savings with the help of your accountant. Every Time I have ran these numbers for a prospective buyer, they were pleased to see the savings. Often the higher mortgage rate is a fraction of the amount the clients have saved on income tax. After seeing those numbers, clients are less focused on the mortgage rate and have a better overall picture of their finances.
Since I like numbers, let’s look at a recent mortgage I did.
| Mortgage Requested $$$ | Rate | Income Required | |
|---|---|---|---|
| "A" Lender | 685,000 | 3.24% | $130,000 |
| "B" Lender | 685,000 | 4.24% | *used alternative income |
Actual reported income was $30,000 which qualified him for mortgage of $105,000.
The lender used 6 months of business banking statements & Company Financials to come up with a reasonable income.
HERE IS THE MATH:
| Income | Combined Tax Rate | $$$ Payable in income tax per year |
|---|---|---|
| $30,000 | 20.06% | $6,180 |
| $130,000 | 40.07% | $52,910 |
Let’s consider all costs:
| Lender | Fees | Interest Savings over 2 years | Income Tax Paid | Total COST |
|---|---|---|---|---|
| A | N/A | $12,999 SAVED | $105,820 | 105,820-12,999= $92,821 |
| B | $26,699 | $12,999 LOST | $12,360 | $26,699 + 12,999+ $12,360= $52,058 |
Are you still looking at the rate? Yes, he got a higher rate and had to pay a fee… He was still ahead $40,763.
DON’T IGNORE THE NUMBERS
It’s all too easy to avoid reality when the real world isn’t telling us the story we want to hear. We close our eyes and hope our problems will magically disappear. In the mortgage world, you can not declare your income and still expect to get the same rate as someone who has taxes automatically deducted for them and don’t have the flexibility to write anything off.
Buying a home is almost never easy, but if you approach the process with a clear head both you and your pocketbook will win in the end.
If you’re a self-employed person or entrepreneur and would like more information on mortgage rates vs tax savings, feel free to comment below or contact me with your questions.
