Self-Employed Mortgages
If you work for yourself, your mortgage problem is rarely that you earn too little. It is that the income a lender is allowed to use is lower than the income you actually live on — because every deduction that reduced your tax bill also reduced the figure on your Notice of Assessment.
About one in seven working Canadians is self-employed. Sole proprietors, incorporated consultants, trades, commission earners, gig and contract workers, and anyone paid in dividends all land in the same place: the paperwork a bank asks for is different, and the first answer is often no at a branch that only knows how to read a pay stub.
That no is frequently wrong. It usually means the file was read the wrong way, not that it cannot be approved.
What a lender actually counts as your income
A salaried applicant hands over a letter and a pay stub. You will be asked for most of the following:
- Two years of T1 Generals, including the statement of business activities, or T2 returns and financial statements if you are incorporated
- Two years of Notices of Assessment, and proof that nothing is owing to the CRA
- Six to twelve months of business bank statements
- Your business licence, master business registration or articles of incorporation
- For contract work, the contracts themselves, and sometimes an accountant's letter
Most lenders then take a two-year average of your net income — what is left after expenses. If you earned $180,000 gross and wrote off $70,000, the lender is working with a figure near $110,000, not $180,000.
Two things move that number back in your favour, and they are the reason a broker is worth the call:
- Add-backs. Some lenders will add back expenses that are not really money out the door — capital cost allowance, a home office claim, a one-time equipment purchase, business use of a vehicle you own anyway. Which add-backs are allowed differs by lender, and nobody publishes a list.
- Gross-up on non-taxable or understated income. Where income is genuinely higher than the return shows and can be evidenced, there are programmes built for exactly that.
If the returns will not support the mortgage
There is a well-trodden path when a two-year average is not enough:
- Insured self-employed programmes. The mortgage insurers have products that accept a reasonable, supportable statement of income for borrowers with strong credit and a sound business, rather than the net figure alone.
- Alternative "B" lenders. They will read bank statements and contracts rather than only the tax return. Expect a higher rate and a lender fee, and expect to put down more — often 20%.
- Private lending, for a defined period, where the plan is to repair or document something and move to a better lender at the end of a short term. See private and second mortgages.
A higher rate for two years is not a failure. Paying it without a written plan to leave it is.
The one thing that sinks self-employed files
Money owing to the CRA. Unpaid income tax, and unremitted GST/HST in particular, will stop an approval that is otherwise sound — and most lenders ask for proof the account is clear. A balance owing can also become a lien on your home, which no lender will sit behind.
If you make GST/HST instalments or you know there is a balance outstanding, deal with it before you apply, or tell us at the start so the file is built around it. It is the single most common reason a strong self-employed application falls over late.
What we do with your file
- Read two years of returns and work out the income each type of lender will actually use — which is usually three different numbers.
- Find the add-backs your return supports, and document them properly rather than arguing them verbally.
- Place the file with a lender whose policy fits your structure, instead of asking one bank and accepting its answer.
- If the answer today is an alternative lender, write down what has to change and when, so the next renewal moves you.
Find out what your business income will actually qualify for
Bring two years of returns and we will tell you the number three different lenders would use.
Speak to a brokerOr call 416-281-9628
Common questions
How long do I need to have been self-employed?
Two years is the usual expectation, because it takes two returns to show an average. Shorter histories can work where you were employed in the same field immediately before, or where the business has strong, documented contracts — but it narrows the list of lenders.
Will I pay a higher rate because I am self-employed?
Not if your returns support the mortgage and your credit is good; you are priced like anyone else. A higher rate comes from needing an alternative lender, not from being self-employed as such.
Should I stop writing off expenses before I apply?
Sometimes declaring more income for two years costs less in tax than it gains in borrowing power, and sometimes it does not. That is a calculation to do with your accountant before you file, not after — and it is worth asking us first what difference it would actually make to your approval.
Does a corporation help or hurt?
Neither by itself. It changes the paperwork — T2s, financial statements, and how salary and dividends are read — and it adds options, such as using retained earnings in some programmes.
Can I use my business bank statements instead of tax returns?
With some alternative lenders, yes — typically six to twelve months of deposits, with a reasonable expense ratio applied. It is a real programme, not a workaround, and it carries alternative-lender pricing.
This page is general information, not tax, legal or financial advice. Every file is different — speak with a licensed mortgage professional and, on anything touching your returns, a qualified accountant before making a decision. Pegasus Mortgage Lending Center Inc., Brokerage, FSRA Licence #11479.
