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Scotiabank recently announced further restrictions around lending for ‘Self Employed’ applicants.  If you are running your own business the uphill struggle to qualify for mortgage financing is not new.

Short Version

If you are self employed you may want the longer version.  Lending options are being radically changed for the worse.  This post is based on recent changes implemented at Scotiabank, who cited the OFSI’s B20 guidelines as the motivator.  It has been suggested that the balance of Chartered Banks will follow suit.  Time will tell.

Long Version

One might suggest that the following changes introduced last week for BFS, or Business for Self, applicants is the final nail in the coffin as far as the relationship between Self Employed applicants and Scotiabank.  (yes this sentence is very similar to a recent post discussing Real Estate investors & Scotiabank)

Scotiabank update; Mortgage For Self-Employed (stated income) Program.

The client(s) cannot collectively own real estate other than a principal residence and one other property that is either a rental or a secondary home (i.e. vacation/leisure or investment).  Each mortgage application shall have ONLY two properties in total maximum.

The spouse cannot bring any additional properties (other than the single additional allowed) to the application either.  This is relevant even if said spouse is not currently on title on the residence as the spouse of all married applicants MUST now be on the application, whether on title or not.  Said Spouse must also meet minimum credit requirements.

The non-owning spouse must sign the Personal Credit Agreement (PCA) and be attached to the mortgage as guarantor (when it is a non-STEP mortgage) or Personal Credit Agreement (PCA) as co-borrower (when it is a STEP).

All applicants must meet the Basic Net Worth standards.  Although there is some variation here dependent on the % of the value of the home being financed, the basic Net worth requirements translate to $15,000.00 liquid capital per $100,000.00 of mortgage money.  ***this is an approximate metric.  RRSP investments are not considered, nor are any other illiquid registered funds.

What does the above mean in plain(er) English?

Effectively these stringent guidelines will eliminate 100% of future applicants who own three or more properties from entering Scotiabank books.  Current mortgage holders are not affected.  Current mortgage holders includes my wife and I.  It feels a bit like Scotiabank has broken up with us, we are in the ‘friend-zone’ now.

We can keep the mortgage we already have with them, but increasing the loan amount or financing any additional property will have to be done via another lender.  Lucky thing I know a guy that be able to offer some other options.

What drives a decision like this?  

Perhaps the risk profile of a self employed individual that owns multiple properties dictated (from Scotia’s experience) that they move away from such applicants.

Perhaps there was not as much ‘cross-sell’ of additional Scotia product to such clients.  After all business owners do tend to be more aggressive and savvy when it comes to the balance of their banking and investment needs.

More likely it is reflective of simple allocation of capital.  Specifically with regard to how Capital can be deployed in the most profitable, and the safest ways.

It seems clear that for Scotiabank the focus will be salaried applicants owning two properties or less.  Joe & Mary sixpack as it were.

We conclude with a similar bottom line as in the past;

Access to money continues to become challenging, in particular for the individual Real Estate investor…as well as the self employed individual.  If you are a mix of both categories then you are truly under greater pressure than ever.

I will work on a good news post next.