The nature of work is changing. Putting in 30 years at a single company and then easing into retirement with a golden handshake is, for many Canadians, a quaint, old-fashioned notion that may have applied to their parents or grandparents, but not to themselves. With a growing number of companies unwilling to offer full-time work, attractive benefits packages, or private pension plans, more and more Canadians are choosing to go into business for themselves, exploring the gig economy, or attempting to turn a passion into a side hustle.
Few professionals understand the struggles of the self-employed as deeply as mortgage brokers, who often have to unleash a combination of magic and financial gymnastics for their clients to appear creditworthy in the eyes of their lender partners. But with lenders pushing their own flexibilities to the limit because of the COVID-19 pandemic, few have an appetite for providing funds to self-employed borrowers whose fiscal futures are far from guaranteed.
No surprise, then, that the private lending space has seen such a rise in demand.
“We have definitely noticed that there’s been an increase in requests from self-employed borrowers,” said Josie Milanetti, Director of Underwriting at Canadian Mortgages Inc. “It was a trend we had noticed prior to COVID-19, but COVID-19 has definitely accelerated it.”
The pandemic has been particularly hellish for the self-employed, many of whom saw their incomes plummet once it kicked into high gear in April and May. Those whose revenue streams haven’t recovered will have their work cut out for them in trying to justify their earnings or GDS/TDS ratio to traditional lenders.
As Milanetti explains, private lenders like CMI offer qualification guidelines that are far less stringent. Rather than qualifying based on net income, many self-employed borrowers are evaluated using a cash flow analysis that takes into account gross income, a step Milanetti said makes “a big difference as to whether or not these clients qualify.” Revenue generated by jobs in the gig economy or through side hustles is also looked on favourably.
“A lot of [borrowers] aren’t aware that they can use the side income that they’re earning to qualify with an alternative lender,” she said.
Benefits for brokers
Milanetti feels demand for private mortgages will only increase, making relationships with private lenders a must for brokers hungry for more market share.
“Once the economy gets back on its feet, we’re going to find more and more borrowers who are seeking opportunities where their income is success-based,” she said, “where they are in control of their income, which jobs they are taking on, and how much they want to work.”
In addition to providing a steady, growing stream of business, private deals typically require less paperwork, regularly making them less tedious and time-consuming – even in cases where a borrower has poor credit or has experienced a decrease in cash flow.
Opening up to the private space can also put brokers in a position to better serve the next generation of first-time buyers.
“More and more young people that are entering the job market today are likely to be business-for-self, or their compensation is success-based, which is not always recognized by an institutional lender,” Milanetti said. “Although they’re meeting their payment obligations and they have really good credit, a traditional lending institution can’t approve them because of their GDS and TDS requirements. That’s definitely driving them toward private lending options.”
For the growing number of self-employed Canadians with dreams of homeownership, uncertainty will remain the norm long after COVID-19 passes into memory. With their 2020 incomes throttled by the pandemic, many of them will need assistance if they are ever to attend their first closing; there’s a good chance that those who do will have brokers with access to private capital standing next to them.