One of my favourite lending programs that allow people to qualify for more mortgage than they would normally do so under traditional guidelines is by using net worth lending. It is what it sounds like: If you have net worth, you can (sometimes dramatically) increase your borrowing capacity if you have reached a ceiling with your income(s).
Now, some of you will undoubtedly ask “Yeah, but, if you can only afford a mortgage of $X, why would you suggest this client borrows more“?.
I am not suggesting it as much as offering it as an alternative. A lot of times people with high net worth do not meet the traditional income-qualifying models that the banks have put forth. Also, a lot of this net worth generates income that may not show up on your tax records and/or cannot be used to qualify you further. Well, that’s where and why net worth lending comes in.
So, how does it work?
Each lender has a different way of qualifying a high net worth borrower, different rules and limits, but generally speaking the program works like so:
We figure out how much you qualify for using traditional income. Let’s take someone who earns $75,000 income per year as a full-time employee. This person can typically qualify for 5.5x that amount in a mortgage, or, 75,000 x 5.5x = $412,500. What if they want to borrow $550,000, though? Well, in this case, they need a net worth of the difference – or – $550,000 LESS $412, 500 = $137,500.
But, of course, there is a catch. They also have to have at least a significant sum of net worth on top, usually $250,000 minimum. And this must exclude the actual down payment they are using.
How do we quantify net worth?
Again, depends on the lender. Some lenders like Manulife and B2B Bank use net worth both liquid, and non-liquid. This can include real estate, vintage art, vintage cars, life insurance policies with a cash surrender value, etc. Some lenders are liquid only net worth as proof. Scotiabank for example has a minimum $250,000 net worth requirement plus the down payment needed. TD Bank? $500,000.
What if my net worth is in RRSPs? What about exclusions?
Totally fine! However, lenders will reduce RRSP net worth by 30%, since there are tax implications of cashing in early on this type of asset. There are some exclusions as well: we can’t use liquid savings in a corporation, for example. We usually can’t use net worth in properties that are held by holding companies.
What do you need as proof?
Here’s where the fun begins! Most lenders want to see a history of this net worth. Some lenders want a 12-month average showing the net worth sitting on account(s) for this long and how much has been going in and out. If you plan on applying for a net worth program, don’t move your money around! It’ll make things that much more difficult to prove. Other lenders want a simple screenshot showing the funds sitting on account for up to 90-days, or, just a screenshot showing today’s balance. If you sold property, we need all documents including sale docs, proof of deposit and solicitor documents to show the money going into your account after the sale.
Are the rates different?
Absolutely not. Matter of fact, net worth borrowers may see better rates than worse rates. The banks like to think these types of clients will eventually be swayed to moving the net worth to their lender, so they will be as aggressive as possible on pricing.
That’s about it! Let me know if you have any questions about your net worth application specifically and I’ll be more than happy to walk you through the process.