The current trend — especially among Millennials — of making a living from the “gig economy” is leaving many struggling to buy a home, according to experts.
Those who derive their income from contract, temporary, freelance or part-time work (or a combination thereof) find it difficult to offer solid proof that they have consistent earnings, which is required to qualify for a mortgage from an A-lender such as one of the big banks or top credit unions. A-lenders generally offer the best mortgage deals such as the lowest interest rates, and allow down payments below 20 per cent.
In a survey released last week by Angus Reid, the polling company said that working in the gig economy is a growing trend, with 40 per cent of Canadian Millennials now earning their income this way. The survey also found that 17 per cent of Canadian workers across all age groups are currently engaged in the gig economy, while the same proportion again (17 per cent) have been employed in this type of work at some point in the past five years, but aren’t now.
Taylor Little, CEO of alternative lender Neighbourhood Holdings, told Glacier Media, “What we’ve seen is that about 40 per cent of our borrowers are self-employed, many of whom are contractors, typically with different income streams, which is consistent with the gig economy… You might not have a single job that pays you $75,000, but you might have a contract that pays you $20K, a part-time job that pays you $25K, and then you make up the balance by picking up freelance gigs and overtime shifts. So collectively you might make the same income as, say, a government worker, but you don’t have consistent income or a T4 slip that you can show a bank on your financing application.”
He added, “That’s really the problem and challenge for workers, especially Millennials. The dynamic of work is changing and that makes it hard for conventional lenders to lend to these borrowers at scale. It’s a problem of income verification. If you’re originating billions and billions of dollars, it’s hard to spend the time to look at an applicant in a holistic way.”
Private mortgage lenders such as Neighbourhood Holdings offer an alternative for gig-economy workers looking to get into the housing market and get a mortgage — although Little concedes that companies such as his only offer short-term, temporary solutions. “We like lending to people with multiple income streams who have shown the ability to be a bit more scrappy in this marketplace,” said Little. “If you get laid off from one of your jobs, you still have the others to lean on and can probably more easily replace your other job.”
Although such lenders are willing to see past the inconsistent income, they tend to offer only short-term mortgages at higher interest rates, rather than a traditional, long-term-affordable mortgage.
Little said, “We offer one-year terms, we do have higher interest rates, and we’re interest-only, so you’re not paying off the principal. We’re not a permanent solution for someone looking for a 25-year mortgage to pay down over time. We’re here to help people get their affairs in order. It’s for people who want or need to buy that house today, but can’t get a traditional mortgage currently.”
Timing is everything
For most people, getting “their affairs in order” means working for an established length of time so that the traditional lenders can see earnings are consistently coming in, even if those earnings are from different sources.
Alisa Aragon, financing expert with Bridgestone Financing Pros, pointed out that another in-between solution is using a B-lender for a one- or two-year fixed-term mortgage, as B-lenders also allow for some flexibility in terms of income verification. “We can use three to six months of bank statements so they can see that the income is coming in on a regular basis. After a year or two, when we have two years’ worth of bank statements or self-employed business earnings, we can move the borrower up to an A-lender [and get a five-year mortgage at a lower interest rate].”
Although B-lenders offer more attractive interest rates than private lending firms, they do not offer such favourable rates as A-lenders — “usually around one to 1.5 percentage points higher,” said Aragon. B-lenders will also require a down payment of 20 per cent or more. This can set up another challenge for a Millennial first-time buyer working in the gig economy, who may struggle to save that much money for a down payment.
“This is where we are seeing a lot of parents are co-signing right now,” said Aragon. “Many of my Millennial mortgage applicants who can’t qualify are bringing their parents on title, as often those parents have paid off their own homes, or have a line of credit they can tap into.”
As both Little and Aragon observe, all of this is just a way to get people into the housing market sooner than later, giving them the opportunity to buy a particular home when it becomes available, or to get out of the rental market sooner. But for gig-economy workers who can’t raise a large enough down payment to take advantage of those short-term loans, it could be a long wait of at least two years before a traditional A-lender will be willing to verify their diverse incomes.