If you’re self employed or the sole proprietor of a small business, it can be challenging to get a mortgage. First, you need to prove that your position is stable, which means providing about two years’ worth of tax returns or business records. Beyond that, it helps to make a large down payment, and if your down payment is at least 20%, you may qualify for a conventional mortgage. What’s that? Well, a conventional mortgage is when 80% or less of the property’s purchase price is covered by the mortgage.
If you buy a home for $300,000, a conventional mortgage only covers up to $240,000, or 80% of $300,000. If you borrow more than that amount, the mortgage is called a high-ratio mortgage. For instance, if you borrow $280,000 to buy a home worth $300,000, that is a high-ratio mortgage.
When you take out a high-ratio mortgage, the bank assumes more risk, and because of that, you have to buy mortgage default insurance. Just like any other insurance product, you pay a premium for this coverage. Then, if you default on the mortgage, the insurer covers any losses your lender incurs. You don’t need that type of coverage with a conventional mortgage, which is one of the reasons these mortgages are easier to get.
In the past, conventional mortgages were not subject to a stress test, which also made approval easier. However, as of January 2018, you have to pass a stress-test for both conventional and high-ratio mortgages. The stress test simply shows whether or not you can still afford the mortgage if the interest rate were increased to the higher of the Bank of Canada’s five-year benchmark rate or your current rate plus 2 percentage points.
Due to the new stress test rules, conventional mortgages aren’t as easy to get as they used to be. But, they are often easier to obtain than high-ratio mortgages, especially for self-employed individuals.