Buying a Home in Toronto as a Self-Employed Individual

Buying a home in Toronto can be challenging, especially for self-employed buyers. With average property prices exceeding $1.15 million, many freelancers, consultants, and entrepreneurs face unique obstacles. Unlike traditional employees who can provide pay stubs or T4 slips, self-employed individuals must prove their income through detailed financial records. This often leads to more scrutiny from lenders.

Despite these challenges, homeownership is achievable with the right approach. This guide explains common obstacles, highlights mortgage options, and offers tips for success. Whether you are a seasoned business owner or new to freelancing, understanding the mortgage process is the first step toward owning a home in Toronto.

Toronto’s Real Estate Market Challenges for Self-Employed Buyers

Toronto’s housing market is one of the most competitive in Canada. As of November 2024, the average home price is $1,150,000 (Toronto Regional Real Estate Board, 2024). For self-employed buyers, the high prices are just the beginning.

Competition in the market adds another layer of difficulty. Traditional buyers with standard income documentation often have an advantage, as lenders prefer predictable income streams. In contrast, self-employed buyers must provide extensive proof of income, which can slow the mortgage approval process.

The mandatory mortgage stress test further complicates things. Borrowers must qualify at a higher interest rate—5.25% or their contract rate plus 2% (OSFI, 2024). For self-employed individuals with fluctuating incomes, this is a significant challenge.

Toronto’s real estate market requires preparation, planning, and expertise, especially for self-employed buyers. With the right strategies, overcoming these challenges is possible.

Key Challenges for Self-Employed Mortgage Applicants in Toronto

Proving Income Stability

Self-employed buyers often face fluctuating earnings. Lenders prefer consistent income, making it harder for self-employed individuals to demonstrate financial stability. This is a common concern for freelancers and entrepreneurs whose monthly earnings vary.

Increased Financial Scrutiny

Lenders apply stricter evaluations to self-employed applicants due to the perceived risks of irregular income. They often require an in-depth review of both personal and business financial records, adding complexity to the process.

Complex Documentation Requirements

Traditional employees can provide straightforward documents like T4 slips. Self-employed applicants must supply more detailed records, including:

• Tax returns for the past two to three years.
• Profit-and-loss statements for businesses.
• Notices of Assessment (NOAs).

These additional requirements can slow down the application process.

Meeting the Mortgage Stress Test

The mortgage stress test requires all borrowers to qualify at a higher interest rate—either 5.25% or their contract rate plus 2%. For self-employed buyers, proving they can handle these hypothetical payments is often a challenge.

Impact of Tax Deductions

Self-employed individuals frequently reduce their taxable income using deductions. While this helps during tax time, it can make income appear lower to lenders. This creates an additional hurdle for mortgage approval.

Limited Traditional Employment History

Lenders often require a consistent income history over several years. For newly self-employed individuals or those with fluctuating earnings, the lack of a traditional employment record can be a barrier.

Overcoming these challenges requires preparation and expert advice. Self-employed buyers who organize their finances and understand lender expectations can improve their chances of mortgage approval.

Mortgage Options for Self-Employed Torontonians

Traditional Banks

Major banks, such as RBC, offer self-employed mortgage products with competitive terms. For example, RBC’s Self-Employed Mortgage allows borrowers to access:

• Up to 80% of a property’s value without default insurance.
• Up to 95% with mortgage insurance.

Most banks require at least two years of self-employment history and recent Notices of Assessment (NOAs).

Credit Unions

Credit unions often provide more flexible options. They may approve borrowers with less than two years of self-employment history. These lenders also tend to offer personalised solutions and competitive rates, making them a strong option for self-employed buyers.

Alternative Lenders

Alternative lenders, such as Home Trust and Equitable Bank, specialise in “Business for Self” mortgages. These lenders:

• Are more lenient with credit score requirements.
• Accept alternative forms of income verification.

This can be a good option for those who don’t meet traditional bank criteria.

Stated Income Loans

Stated income loans cater to self-employed buyers who report lower net income due to business deductions but have higher gross income. These loans:

• Typically require a minimum 10% down payment.
• Are available for properties valued under $999,000.

This option allows buyers to qualify based on projected income rather than strictly on reported income.

Private Lenders

Private lenders, often accessed through mortgage brokers, provide flexible solutions for buyers who cannot qualify with conventional lenders. While private mortgages may have higher interest rates, they are more accommodating when it comes to:

• Income verification.
• Credit history considerations.
• Choosing the Right Option

Each mortgage option comes with unique qualifications and benefits. Working with an experienced mortgage broker familiar with self-employed buyers can help identify the best fit. By exploring all available options, self-employed individuals can find the right solution for their needs in Toronto’s competitive housing market.

Qualification Requirements for Self-Employed Mortgages in Toronto

Income Verification

Self-employed buyers must provide detailed documentation to prove their income. Common requirements include:

Traditional Documentation:

• Two to three years of T1 Generals and Notices of Assessment (NOAs).
• Financial statements for incorporated businesses.
• T4A slips for contract work.

Alternative Documentation (if applicable):

• Bank statements showing regular deposits.
• Contracts or invoices for ongoing work.
• GST/HST returns.
• Business licence and registration documents.

Down Payment Requirements

Down payment rules vary depending on the property price:

• 5%–19.99% Down Payment: Requires mortgage default insurance from providers like CMHC, Sagen, or Canada Guaranty.
• 20% or More Down Payment: Qualifies as a conventional mortgage without default insurance.
• 20% Minimum Down Payment: Required for properties priced over $1 million.

Some lenders may require self-employed buyers to provide a larger down payment, often starting at 10%.

Credit Score Considerations

Lenders evaluate credit scores as part of the approval process:

• 660+ Credit Score: Improves chances of approval with most lenders.
• 680+ Credit Score: Considered excellent and offers access to the best rates.
• 620–679 Credit Score: May qualify with some lenders but could come with higher rates.
• Below 620: Limited options and often higher down payment requirements.

Additional Requirements

Self-employed applicants may also need to meet these conditions:

• At least two years of self-employment history (some lenders accept less).
• Proof of paid HST/GST.
• Both personal and business credit scores.
• Confirmation of principal ownership in the business.
• Evidence that the down payment is not a gift.

Lenders also assess the stability and nature of the business and the applicant’s experience in their field. All applicants must pass the mortgage stress test, which requires qualifying at a rate higher than the actual mortgage rate.

Preparing for Approval

Understanding and meeting these requirements improves your chances of securing a mortgage. Organizing your documents and consulting with a professional can make the process smoother and more efficient.

Toronto-Specific Strategies for Self-Employed Mortgage Applicants

Leverage Toronto’s MLS® Home Price Index

The MLS® Home Price Index, provided by the Toronto Regional Real Estate Board (TRREB), tracks property values across the city. Self-employed buyers can use this data to:

• Support property valuations during mortgage applications.
• Strengthen their case in competitive bidding situations.

Explore Co-Ownership Options

Toronto’s high property prices make co-ownership a practical solution. Partnering with family members or other self-employed individuals can:

• Increase purchasing power.
• Reduce the financial burden of homeownership.

The City of Toronto’s “Missing Middle” initiative supports diverse housing options, making co-ownership more accessible.

Target Up-and-Coming Neighbourhoods

Consider buying in more affordable areas like Scarborough or parts of North York. These neighbourhoods often offer:

• Lower property prices.
• Strong long-term investment potential.

Use the City of Toronto’s Neighbourhood Profiles to evaluate economic and demographic trends.

Take Advantage of the First Home Savings Account (FHSA)

The FHSA allows first-time buyers to save up to $40,000 tax-free. This account helps self-employed buyers:

• Build a larger down payment.
• Offset challenges related to income verification and mortgage approval.

Investigate Toronto’s Home Buyer Incentives

Programs like the First-Time Home Buyer Incentive provide up to 10% of a property’s purchase price. While income caps apply, eligible self-employed buyers can:

• Reduce their borrowing needs.
• Make monthly payments more affordable.

Work with Toronto-Based Mortgage Brokers

Mortgage brokers with experience in the Toronto market can guide self-employed buyers through the process. They can:

• Help navigate complex lender requirements.
• Identify solutions tailored to self-employed applicants.

The Canadian Mortgage Brokers Association – Ontario is a helpful resource for finding qualified brokers.

Prepare for Unique Closing Costs

Toronto buyers face significant closing costs, including municipal and provincial Land Transfer Taxes. Self-employed buyers should:

• Plan ahead to cover these expenses.
• Explore first-time buyer rebates to reduce costs.

Applying These Strategies

By adopting these strategies, self-employed buyers can improve their chances of success in Toronto’s real estate market. Careful planning and local expertise can make homeownership more achievable.

Tips for Improving Mortgage Approval Odds for Self-Employed Torontonians

Securing a mortgage as a self-employed individual in Toronto can be challenging, but these strategies can help boost approval odds:

1. Keep Well-Organised Financial Records
Maintain detailed and accurate records of both personal and business finances, including income statements, balance sheets, and cash flow summaries. The Canada Revenue Agency advises retaining these records for at least six years, which can also help establish trust with lenders.

2. Separate Personal and Business Finances
Use dedicated accounts for business transactions to ensure a clear distinction between personal and business expenses. This not only simplifies tax filings but also demonstrates strong financial management to lenders, as recommended by the Financial Consumer Agency of Canada.

3. Save for a Larger Down Payment
A significant down payment, ideally 20% or more, can mitigate some of the challenges related to income verification and help avoid mortgage default insurance. The Canada Mortgage and Housing Corporation highlights that a larger down payment can also improve access to better rates.

4. Partner with a Self-Employed Mortgage Specialist
Working with a mortgage broker experienced in self-employed applications can make a significant difference. Such professionals understand complex financial situations and have access to lenders who specialise in non-traditional income. The Canadian Mortgage Brokers Association is a good resource for finding qualified brokers.

5. Consider Incorporating Your Business
Incorporation can offer tax benefits and more flexibility in income reporting, which may help improve your financial presentation to lenders. Consult with a chartered professional accountant to see if this approach fits your circumstances.

6. Prepare for Slightly Higher Interest Rates
Self-employed mortgages may come with higher interest rates. Budget for this possibility and consider obtaining pre-approval to lock in a favourable rate. Keeping track of interest rate trends through resources like the Bank of Canada can assist in financial planning.

7. Strengthen Your Credit Score
A high credit score is a key factor in mortgage approval. Regularly review your credit report, ensure timely bill payments, and aim to keep credit utilization below 30%. Equifax and TransUnion provide free annual credit reports for Canadians.

8. Demonstrate Income Stability
Show consistent or increasing income trends if possible. This can reassure lenders about your ability to handle mortgage payments despite income variability. Resources like those offered by the Canadian Federation of Independent Business can assist with financial management.

By adopting these strategies, self-employed Torontonians can build a stronger mortgage application, improving their chances of success in the competitive housing market.

Final Thoughts from The Smith Proulx Team

Navigating the mortgage process as a self-employed individual in Toronto may seem complex, but with the right strategies and preparation, homeownership is within reach. By maintaining clear financial records, working with experienced professionals, and leveraging Toronto-specific resources, you can confidently approach the market and secure the right mortgage for your needs.

At The Smith Proulx Team, we’re here to help you every step of the way. Whether you’re exploring High Park, Junction Triangle, or other west-end neighbourhoods, our team’s local expertise and commitment to your goals make us the ideal partners in your real estate journey. Let’s make your dream of homeownership a reality—connect with us today to get started.

Citations and References

1. Toronto Regional Real Estate Board (TRREB), 2024.
2. Canada Revenue Agency (CRA), 2024.
3. Financial Consumer Agency of Canada (FCAC), 2024.
4. Canada Mortgage and Housing Corporation (CMHC), 2024.
5. Office of the Superintendent of Financial Institutions (OSFI), 2024.
6. City of Toronto, 2024.
7. Canadian Mortgage Brokers Association – Ontario (CMBA-Ontario), 2024.
8. Canadian Federation of Independent Business (CFIB), 2024.
9. Chartered Professional Accountants Canada (CPA Canada), 2024.
10. Equifax Canada, 2024.
11. TransUnion Canada, 2024.
12. Bank of Canada, 2024.