Taylor Little is CEO of Neighbourhood Holdings
Canada’s increasingly restrictive mortgage regulations and the rising interest rates issued by the Bank of Canada never cease to grab our attention. But their impact on Canada’s expanding gig-based work force has rarely been examined.
Some estimates have the “non-traditional” work force (self-employed, consultants, freelancers, independent contractors etc.) comprising between 20 per cent to 30 per cent of all working Canadians. But, as Canada’s work force becomes more gig-based, conventional mortgage regulation is trending ever further from recognizing this fact. The result? Non-traditional workers in Canada are facing a harsh reality when it comes to applying for a home mortgage: rejection.
Mortgage rules for the traditional full-time work force
Up until the 1980s, the Canadian labour force was made up primarily of full-time, salaried workers. Baby boomers were the majority of the workers and were also actively seeking home ownership and beginning to borrow more in general. The National Housing Act (NHA) Mortgage Backed Securities program was introduced in 1986 in an effort to help provide housing for Canadians by lowering the cost of residential mortgages. This program worked by enabling mortgage originators to issue loans that could then be pooled with other mortgage loans and thereafter sold to investors, along with a guarantee from the government of Canada. However, in order to qualify for that pool, mortgages had to be written to a consistent standard. An important part of the underwriting practice was to look specifically for stable income streams by evaluating a potential borrower’s T4 tax form, among other things. This standardized practice eliminated errors that could be associated with more complex reviews of other income sources (particularly by entry-level employees), and therefore allowed for conventional mortgage lenders to achieve the scale required to meet the rising mortgage demand. Given the characteristics of the work force at the time, the mortgage rules and the underwriting process made sense.
The rise of the gig economy
Non-traditional workers are not your usual salaried employees, which puts them directly at odds with mortgage-qualification rules. Without regular paychecks or access to financial statements such as the T4, gig workers have found themselves on the wrong side of conventional mortgage lenders. Even if a bank wanted to give someone a mortgage, the current loan-approval process makes qualifying for a mortgage near impossible for individuals who don’t work standard 40-hour weeks.
Unfortunately for gig workers, the issue of not having a steady income stream presents itself as a significant obstacle to becoming a homeowner. In the eyes of the conventional mortgage lender, having a good credit score or an annual income from multiple sources that’s comparable to a salaried worker in aggregate is often still not enough to close the deal on a mortgage. Since mortgage qualifications are rooted in antiquated lending guidelines, conventional mortgage lenders haven’t been able to effectively adapt to the changing labour market, therefore increasing the demand for alternative financing options for this next generation of workers.
Qualifying for a Mortgage Without a Salary
Cue the alternative lender: Where credible borrowers have previously been denied by conventional mortgage lenders as a result of increasingly restrictive regulations, alternative lenders employ a more qualitative approach to reviewing a mortgage applicant’s situation. In fact, my company recently found that more than a third of our borrowers are non-traditional workers.
When the federal government toughened mortgage rules in 2018, the subsequent squeeze on conventional lenders had a ripple effect on alternative mortgage lenders. With fewer borrowers qualifying for a conventional mortgage and fewer mortgages being originated or renewed, some of the volume flowed into the alternative-lender space. At Neighbourhood, we have not only seen a steady increase in the number of interested borrowers, but we also saw our average credit score increase, reaffirming that some borrowers with higher credit quality were being turned away by the banks.
For a non-traditional worker, the likelihood of receiving a loan from an alternative lender versus a conventional mortgage lender is greater for a couple reasons. When assessing a borrower’s qualifications, alternative lenders tend to take more than just credit history into account; for example, they also consider the type and reasonability of income and can include other factors that may be unique to the borrower’s situation. Alternative lenders are also more adaptable to changing market conditions and have greater flexibility when it comes to providing credit to people in unique situations – such as gig workers – in which the banks hold out. Interestingly, from a risk perspective, it could be said that an applicant with several sources of income is less of a risk than one with a single source of income: Whereas the latter faces the potential of being laid off and left with no income, a gig worker would likely only (temporarily) lose a part of their income. While alternative lenders may not be a permanent financing solution for borrowers, they provide the unconventional, unsalaried population with an opportunity to work toward graduating to a conventional mortgage lender.
The Changing Face of Creditworthiness
Why is this important? Because as the conventional mortgage market becomes increasingly regulated, it’s simultaneously failing to adapt to the changing face of today’s work force. Layer in the fact that many of the assets generally acquired through financing – leisure goods and services, and, in particular, housing – are increasing in value, and we get a clear image of an economy in which tens of thousands of potential borrowers are being left on the sidelines. In short, conventional mortgage lenders and their regulations are systematically undervaluing a gig worker’s hustle.
It takes time to build up an income track record and the required documentation to support a conventional mortgage application. Until the mortgage industry catches up to the 21st century work force and evolves to serve the growing gig economy, freelancers and the self-employed need to consider their choices for financing. Whether that’s paying a visit to a mortgage broker to plan their next move or using an alternative lender as a stepping stone to credit while they work to satisfy a conventional lender of their creditworthiness, they should know their options and stay the course.