Should you pay a higher rate.....the answer might be yes
Recently we have encountered many self employed individuals coming to us looking for a mortgage. In many cases, they have talked to their current lender, who have stated that the individual will need to claim $120,000 in income to qualify for the mortgage of $550,000. Even though these clients have the ability to claim write offs to lower their income they forgo this and claim the higher income to qualify and PAY WAY TO MUCH IN TAX.
What if there was a smarter solution?
In this scenario we had a client that had the ability to write off his income to $40,000 a year with the write offs but their lender told them to claim $120,000. Obviously, this would trigger a lot more income tax but the client would get the mortgage he wanted to buy the house.
Our solution was for our client to take an alternate lender that looks at income with bank statement deposits instead of income tax returns. While they have a small fee and a little higher rate, our analysis showed that this option was actually more cost-effective, as demonstrated below:
His Current Lenders Option: Income Claimed - $120,000 Total Income Tax - $33,852 Interest paid on - $38,254 1 year at 7.09% Total Tax, interest and Fees - $72,106 | Browne Mortgages Option: Income Claimed -$40,000 Total Income tax - $8,627 Interest paid on - $40,393 1 year at 7.49% Lender fee - $5,500 Total Tax, Interest and Fees - $54,520 |
Despite our lender's 1% fee and slightly higher interest rate, we were able to save our client a significant amount. In fact, by opting for our recommended solution, our client would save $17,586, as their income tax bill was substantially reduced.
Although paying a higher rate may seem counterintuitive, the potential tax savings and cost-effectiveness of alternative lenders make it a compelling option for self-employed individuals seeking a mortgage. Talk to one of our mortgage brokers today