16 May

Do You Understand the B-20 Mortgage Guidelines?

Mortgage Tips

Posted by: Jordan Thomson

A new survey has emerged showing that out of 1,901 owners and would be homeowners, 43% (more than two out of five) Canadians are not confident in their knowledge of the mortgage stress tests—despite them being in place for more than a year now.

We wanted to give you a brief set of notes regarding the guidelines. This is something you can use and reference whether you are a first-time home buyer or looking to refinance underneath these new guidelines. It gives a clear picture of what/how you are impacted as a buyer or someone who is looking to refinance.

Here’s what you need to know about B-20:

The average Canadian’s home purchasing power for any given income bracket will see their borrowing power and/or buying power under these guidelines reduced 15-25%. Here is an example of the impact the rules have on buying a home and refinancing a home.

PURCHASING A NEW HOME

When purchasing a new home with these new guidelines, borrowing power is also restricted. Using the scenario of a dual income family making a combined annual income of $85,000 the borrowing amount would be:

Up To December 31 2017 / After January 1 2018
Target Rate 3.34% / 3.34%
Qualifying Rate 3.34% / 5.34%
Maximum Mortgage Amount $560,000 / $455,000
Available Down Payment $100,000 / $100,000
Home Purchase Price $660,000 / $555,000
REFINANCING A MORTGAGE

A dual-income family with a combined annual income of $85,000.00. The current value of their home is $700,000. They have a remaining mortgage balance of $415,000 and lenders will refinance to a maximum of 80% LTV. The maximum amount available is: $560,000 minus the existing mortgage gives you $145,000 available in the equity of the home, provided you qualify to borrow it.

Up to December 31, 2017 / After January 1 2018
Target Rate 3.34% / 3.34%
Qualifying Rate 3.34% / 5.34%
Maximum Amount Available to Borrow $560,000 / $560,000
Remaining Mortgage Balance $415,000 / $415,000
Equity Able to Qualify For $145,000 / $40,000
Source (TD Canada Trust)

These guidelines have been in place since January 1, 2018 and we are starting to see the full impact of them for both buyers and those looking to refinance. Stats are showing that there is a slowdown in the real estate market, however there is also a heightened struggle for many buyers to now obtain approval under these new guidelines. It’s a difficult situation as the cry for affordable housing is still ongoing as the new guidelines may slow down the market but appear to further decrease the borrowing/buying power of individuals.
Keep in mind, this is just a brief refresher course on the B-20 guidelines. As always, if you have more questions or are looking for more information,I suggest that you reach out to discuss and get a full and detailed look at how it will impact you personally.

Thanks to DLC’s Geoff Lee for this info.

9 May

Sole Proprietors and Mortgage Qualification

Mortgage Tips

Posted by: Jordan Thomson

Sole proprietors are individuals who run their own business and do not have it set up as a corporation or partnership. The biggest difference between them and a corporation is that a sole proprietor does not have separation between their business and themselves. This means that when taxes are filed, all costs that are essential to the operation of the business are tax deductible on the individuals tax return. For example, an electrician who operates as a sole proprietor may earn $80,000 a year in income. However, costs such as materials, vehicle expenses, office space, or marketing (to name a few), are subtracted from the gross income- $80,000 in this case.

If those costs added up to $15,000 in a fiscal year, that sole proprietor really only earns $65,000 of income in the eyes of the lender. That is because the amount they are taxed on is the net income of $65,000 not the gross business income of $80,000. When submitting an application for a sole proprietor, you can either use a 2-year average of the net business income (income qualified) or state the income (stated files) based on history of earnings and the businesses write offs/expenses.

Majority of the time, we take the previous two years of income reported on line 236 of the T1 Generals, add them together, and divide that by two. If a business earned $80,000 of gross income and $65,000 of net income in year 1, and then $90,000 of gross income and $70,000 of net income in year 2, their income in the eyes of the lender is $67,500 ($65,000 + $70,000 = $135,000/2 = $67,500). There is an opportunity to “gross up” the 2-year average by 15%, but that requires a closer look at what the business has claimed as write offs for their business expenses. A gross up of 15% on $67,500 of income would equal $77,625.

Operating a business as a sole proprietor is a small cost when comparing it to a corporation, main reason being there is only one tax return prepared for both the business and the individual. The down side, an individual must pay income tax at the personal tax rate on the entire net income, whether they required all that income or not.

A corporation on the other hand, pays income tax at a different tax rate lower than the personal tax rate. That way, an individual only needs to take the income out of the corporation that they need, decreasing the amount of income tax they pay on their personal tax return (if money is left inside the corporation).

If you are a sole proprietor and are curious to know what kind of mortgage amount you can qualify for, let’s talk!