The path to homeownership isn’t the same depending on whether you’re self-employed or a salaried employee.
In fact, financial institutions exercise more caution when lending large sums to people whose income tends to fluctuate from month to month or year to year.
Nevertheless, a self-employed person can qualify for a mortgage with the proper preparation.
Reviewing the Past 2 or 3 Years
During the mortgage or loan pre-approval process, the financial institution will usually want proof of income documents covering the past two or three years.
It will then base its analysis either on the average for those years or the lowest annual income. The financial institution’s primary concern is always to protect itself as the lender. It does this by determining the minimum plausible income to ensure that even during a slump period, the borrower will still be able to repay their loan.
Making the Home Purchase Process Easier When You’re Self-Employed
The key point to keep in mind is that financial institutions use the same data the self-employed person provides to the government (on their tax return).
Therefore, a self-employed person who declares a low income year after year is less likely to get pre-approved for a high mortgage.
“If you want to buy a home, avoid paying yourself in dividends (as these aren’t considered income by financial institutions). Instead, pay yourself a good salary. You can use an RRSP or FHSA to reduce your income tax while safeguarding the borrowing capacity you need for your future home purchase.”
Financial security advisor and owner of Groupe Financier Symbiose
Drafting a Base Budget When You’re Self-Employed
In a parallel vein, for the self-employed, preparing a budget several months if not years ahead of their property purchase may be particularly advantageous.
This budget will differ significantly from that of a salaried employee. The primary difference stems from the fact that when you’re self-employed, you’re responsible for setting money aside to pay taxes and insurance.
Calculating Your Gross Taxable Income
Calculating Your Gross Taxable Income
To make sure you include all your expenses, gather all your bank and credit card statements. Next, deduct your business expenses (office rent, materials, subcontractors’ fees, etc.) from your gross income (before taxes) to determine your gross taxable income.
And then, distribute as follows:
40–42% (income tax and RRQ):
- Approximately 30%: should be set aside for tax payments. This percentage is an average and will vary depending on your income and applicable tax rate. Adjust accordingly.
- 10–12%: must be paid into the Quebec Pension Plan (QPP). The rate was 10.8% for 2024 (indexed annually). It should be noted that for salaried employees, this total contribution is shared equally with the employer and is deducted directly from their wages.
4% to 6% (insurance): should be dedicated to protecting the self-employed person and their family’s income and retirement, chiefly through life, disability, and critical illness insurance. Because they don’t have access to group health coverage, the self-employed often pay higher premiums than salaried employees. The actual cost of this coverage depends on the person’s age and health and therefore varies between 4% and 6%.
10% (long-term saving): should be invested to save for retirement. The self-employed are 100% responsible for their retirement strategy, unlike most salaried employees who have access to a pension fund or other collective retirement savings plans.
10% (short-term saving): should be applied to all preretirement projects, such as travel, a new child, the children’s RESPs, purchasing a property, renovations, etc.
Whatever’s left: becomes the amount that makes up your net salary and therefore your budget for paying regular expenses (groceries, housing, savings, an emergency fund, etc.).
Once you’ve finished crunching the numbers, you can approach your homeownership dream more objectively. Many people realize that they must cut back on certain expenses to achieve this goal. They may alternatively decide to buy a less expensive home. But don’t let that stop you! Your first home purchase may not be perfect, but it’s a great first step on the property ladder!
Make sure you’re financially protected at a price that corresponds to your needs by working with a financial security advisor who specializes in assisting self-employed clients.
