How do you get a mortgage when you have a lot of assets, because you are relatively wealthy, so much so, that you don’t have to work? Nice problem to have! But here’s the thing, most conventional mortgages require you to have a substantial income so you can make monthly payments. Maybe you have a trust fund, rental properties, or investments that provide you with all the income you need. In this situation, how do you get a mortgage for your mansion on the hill or another rental building to add to your portfolio? The answer is a Mortgage Net Worth Program.
A Net Worth Program in Canada is a mortgage product designed for high-net-worth individuals who may not have a regular or high income but possess significant assets. This program allows them to qualify for a mortgage based on their overall net worth rather than relying solely on their income to meet traditional mortgage lending criteria.
Qualifying for a Net Worth Program
Wealth Management or Financial Plan
Key Characteristics
Key characteristics of the Net Worth Program include:
- Asset-Based Qualification: Lenders focus on the borrower’s total assets, such as investments, savings, real estate, and other liquid assets, to determine eligibility. This is particularly helpful for self-employed individuals, retirees, or others with irregular income streams but substantial financial holdings.
- Eligibility: Borrowers may need to show a minimum net worth (e.g., $1 million in assets) to be considered for this program. Lenders typically evaluate liquid assets that can easily be converted to cash.
- Documentation: Instead of emphasizing income, applicants must provide detailed documentation of their assets, including bank statements, investment portfolios, and other proof of ownership.
- LTV (Loan-to-Value) Ratios: Loan-to-value ratios may be more flexible in this program. Lenders may allow higher LTVs for borrowers with a strong asset base.
- Interest Rates: Interest rates in Net Worth Programs may be slightly higher than traditional mortgage rates, depending on the lender’s risk assessment.
- Target Audience: This program is aimed at individuals like investors, business owners, retirees, or those with high-value real estate holdings who may not fit the traditional income-driven lending model but have the financial capacity to support a mortgage.
It’s a solution that accommodates borrowers who, while lacking regular income, demonstrate financial strength through their accumulated wealth. Different lenders may have unique policies and criteria for these programs.
Additional Key Points:
- Interest Rates: Lenders may offer competitive or slightly higher rates depending on the risk assessment.
- Asset Types Considered: Typically include savings, GICs, stocks, bonds, mutual funds, and equity in real estate.
- Down Payment Flexibility: The down payment for a Net Worth Mortgage can sometimes come from the asset portfolio itself, reducing the need for liquidity at the time of purchase.
- Non-Resident Eligibility: Some Net Worth Programs may be available to non-resident borrowers, particularly in markets like Toronto and Vancouver, where foreign investors often participate.
Lender Guidelines
Each lender may have specific guidelines and criteria, so it’s best to review the program details with Allen Ehlert to see which is most suitable for your particular financial situation.
NOTE: Gifts are not allowed to be used to qualify for a Net Worth Program
For borrowers applying for a Net Worth Program who may not have a traditional job or consistent income, lenders assess their ability to make mortgage payments based on their overall financial strength rather than a regular paycheck. Here are some ways they can demonstrate their capacity to make mortgage payments:
Liquid Assets
- Borrowers can use liquid assets like savings, investment portfolios (stocks, bonds, mutual funds), and other easily accessible funds to cover mortgage payments. Lenders will often require proof of sufficient liquid assets that can be drawn down over time to meet the monthly mortgage obligations.
- Some lenders even require a certain number of months’ worth of mortgage payments (e.g., 12-24 months) to be set aside in liquid assets as a reserve. This assures that payments can be sustained without a regular income.
Income from Investments
- Borrowers who generate income from their investment portfolios (e.g., dividends, interest income, rental income from real estate properties, or capital gains from stock sales) can use these as a source of funds to cover mortgage payments.
- Even though they may not have employment income, these income streams can be considered stable sources of funds by the lender, especially when coupled with the overall value of the assets.
Drawdown from Retirement Accounts
- For retirees, funds from retirement accounts (such as RRSPs, TFSAs, or pensions) can be used to make mortgage payments. If a borrower is drawing regular disbursements from their retirement accounts, that can serve as a viable source of income.
- Lenders look at how much is available in these accounts and the planned rate of withdrawal to determine whether there is sufficient funding for mortgage payments over the long term.
Rental Income from Other Properties
- Many high-net-worth individuals own investment properties that generate rental income. This rental income can be used to service the mortgage on their primary residence or other properties.
- Lenders often count up to 50-80% of rental income when calculating the borrower’s ability to make mortgage payments, allowing them to factor in this income stream even if it’s not their primary source.
Partial Employment or Self-Employment Income
- Some borrowers may still have irregular income from part-time work, consulting, or self-employment. While this may not be the main qualifier, lenders will take it into account along with the borrower’s assets.
- For business owners or investors with fluctuating income, lenders can look at averaged income over multiple years to assess their ability to make payments.
Wealth Management Strategy
- High-net-worth individuals often work with financial planners to manage their wealth, ensuring that they have a strategy in place to cover living expenses, including mortgage payments.
- Lenders are often more comfortable approving a mortgage for individuals with a well-structured financial plan showing how they will manage cash flow from their assets to meet obligations, including the mortgage.
Interest-Only Payment Option
- Some lenders may offer interest-only mortgage options for high-net-worth individuals, meaning that for a certain period, the borrower only pays the interest on the loan rather than the principal. This reduces the monthly payment burden, allowing them to manage cash flow more effectively in the short term.
Asset Depletion Method
- Some lenders use an asset depletion method, where they calculate an assumed annual income based on the borrower’s total assets. For example, if a borrower has $2 million in assets, the lender might assume a certain percentage (e.g., 4% per year) could be withdrawn to cover living expenses, including mortgage payments.
- This calculated income is then used to determine whether the borrower can afford the mortgage.
Key Example of Asset Use:
If a borrower owns $2 million in various investments and savings, and the lender assumes a conservative withdrawal rate of 4% per year, this would provide the equivalent of $80,000 per year in income, which can be used to qualify for a mortgage even if the borrower doesn’t have traditional employment.
Qualifying for a Net Worth Program
To qualify for a Net Worth Program mortgage in Canada, there are some key steps and specific requirements lenders will assess. While eligibility criteria vary by lender, here are the common requirements you should be prepared to meet:
- High Net Worth: Lenders typically require a minimum net worth of $1 million or more. This includes liquid assets (cash, stocks, bonds) and non-liquid assets (real estate, business holdings).
- Sufficient Liquid Assets: You may need to demonstrate that you have enough liquid assets to cover a certain number of mortgage payments (typically 12 to 24 months of payments). Liquid assets are favored because they can easily be converted to cash.
- Investment Income: If you earn income through investments (e.g., dividends, interest, capital gains), you will need to provide documentation showing consistent income generation from these sources. For instance, brokerage statements, real estate rental income, or proof of withdrawals from retirement accounts may be required.
- No Traditional Income Requirement: Many lenders will still consider your ability to manage finances without a regular job. They look at other income sources like part-time self-employment, rental income, or financial support from structured withdrawals (from an RRSP or investment account).
Documentation Needed
Lenders will require substantial documentation to verify your financial position:
- Proof of Assets: You must provide documentation of your liquid and non-liquid assets. This may include:
- Bank statements (for savings and checking accounts)
- Investment account statements (stocks, bonds, mutual funds, GICs)
- Appraisal reports for real estate properties owned
- Business ownership documents or shares in companies
- Pension or retirement account balances (RRSP, TFSA)
- Income from Investments: Documentation of any investment income (e.g., dividends, interest, or rental income from properties).
- Tax Returns: Some lenders may request tax returns from the past 1-3 years to verify how you have managed your wealth or report investment gains. This also shows consistency in income generation or withdrawals from investment portfolios.
- Net Worth Statement: A net worth statement that lists all of your assets and liabilities may be required. Some lenders may ask for this to be certified by an accountant or financial advisor.
- Mortgage Payment Reserves: You may need to provide a statement showing that you have sufficient liquid assets to cover future mortgage payments (typically 12 to 24 months’ worth).
- Real Estate Rental Income: If you own investment properties, you may need to provide rental agreements, current lease agreements, or statements showing consistent rental income.
Down Payment Requirements
The down payment must generally come from your own resources or verified assets. Lenders want to ensure that the down payment is sourced from liquid assets or real estate equity.
The minimum down payment for a Net Worth Program mortgage can range from 20% to 35%, depending on the lender and the overall value of your assets. This is because most of these mortgages are uninsured, requiring a higher upfront investment.
Loan-to-Value Ratio (LTV)
Lenders offering Net Worth Programs usually offer a Loan-to-Value (LTV) ratio between 65% and 80%. This means you may need to put down at least 20% to 35% of the property’s value as a down payment. The exact LTV ratio depends on your net worth and the lender’s criteria.
Interest Rates
Interest rates on Net Worth Program mortgages may be similar to or slightly higher than conventional mortgage rates, depending on the lender’s risk assessment of your financial situation.
Non-Resident Applicants
Some Net Worth Programs are also available to non-residents with high net worth. In this case, additional documentation may be required, such as proof of foreign income or assets, and LTV ratios for non-residents may be more conservative (e.g., 65%).
Wealth Management or Financial Plan
Some lenders may require you to work with a wealth management advisor or submit a formal financial plan demonstrating how you will manage your assets and cash flow over the term of the mortgage. This can include:
- A strategy for drawing down investments or retirement funds over time.
- A plan for managing cash flow from rental properties or other income sources.
A formal plan can help mitigate concerns the lender might have about irregular income.
Practical Example
An applicant with $1.5 million in liquid assets (stocks, savings, and mutual funds) and a $2 million property portfolio (with rental income of $60,000 per year) applies for a Net Worth Program mortgage.
- Documentation: They provide:
Investment account statements showing $1.5 million in liquid assets.
Appraisals for the properties they own.
Rental income statements showing $60,000 per year from the properties.
- Down Payment: They wish to purchase a new home for $1.5 million and provide a 35% down payment ($525,000) from their liquid assets.
- Mortgage Approval: The lender assesses their ability to draw on their $1.5 million in assets, their rental income, and ensures that they can cover 12-24 months of mortgage payments based on liquid assets. The applicant qualifies for the mortgage without traditional employment.
Conclusion
To qualify under a Net Worth Program in Canada, the applicant’s total financial situation is assessed. They must demonstrate high levels of assets, provide substantial documentation, and potentially show reserves to cover payments. If they lack traditional income, lenders will rely on liquid assets and other forms of income or financial planning to ensure mortgage affordability.
