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How to get a low rate home loan while self-employed

Approximately 17% of Australian workers are self-employed, and banks are very aware of this. The lenders who want to be seen as competitive to attract more borrowers are finding ways to cater to this sizeable demographic.

In this article, we’ll go through the top questions self-employed Aussies have about getting home loans, as well as how to make sure you get a good interest rate.

How much can I borrow as a self-employed home buyer?

In general, if you can provide 2 years of tax returns, you’ll have a high borrowing power — possibly up to 95% of the property value. Just like with other borrowers though, if you borrow a loan amount above 80% (i.e. having a high Loan to Value Ratio), you will usually be subject to Lenders Mortgage Insurance (LMI) fees.

Applying for a home loan as a self-employed home buyer typically involves having to jump through a few more hoops than other borrowers. So, your chance of getting a high LVR loan is lower. As a general rule, the less documentation you have proving your income, the less money you’ll be able to borrow.

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How long do I have to be self-employed in order to qualify for a home loan?

Individual lenders have differing criteria, but most will ask you to provide at least two years worth of tax returns. Therefore, your chances of being approved for a self-employed home loan will be greater if you’ve been self-employed for at least 2 years.

If you’ve been self-employed for between 1 and 2 years, some lenders may still consider you. Lenders will consider your application logically and work out whether they think your form of self-employment will continue to be viable into the future. In general, you may face difficulties getting approved for a home loan if you haven’t had much success yet in your self-employment.

However, everyone has different circumstances. For example, let’s look at an electrician who has only had their own business for 18 months. Their chances of being approved for a home loan will look pretty good if they had been employed as an electrician for a few years prior to opening their business.

Can I get a home loan if I’ve been self-employed for less than a year?

Your chances of getting a home loan if you have been self-employed for less than a year will be lower than if you wait at least 1 year. Lenders have to think about what’s in their best interests as a business and tend to avoid high-risk borrowers.

As a recently self-employed person, you won’t have the tax returns to prove your income. In addition, newer businesses come with high risk — particularly in their infancy. Many businesses don’t last past their first year operating, and lenders don’t want to deal with borrowers defaulting on their loan repayments.

Lendi works with lenders that offer specialty self-employed home loans. So, if you’re keen to get a home loan ASAP, it’s worth speaking to one of our experts.

What documentation do I need to show a lender when applying for a self-employed home loan?

In addition to the standard documents required for a mortgage (i.e. identification, financial statements, assets, liabilities), self-employed borrowers will need to provide documentation verifying their income. The required documents may include:

  1. ABN: you’ll need to provide your Australian Business Number and/or Certificate of Incorporation
  2. Borrower’s income declaration: this signed document verifies your income to prove to lenders that you can afford the mortgage repayments
  3. Business activity statements (BAS): from at least the last 6 to 12 months, verified by the ATO
  4. Tax returns: usually your 2 most recent
  5. Business and personal transaction statements: at least 6 months worth (some lenders may require more details of your expenses)
  6. GST registration: where applicable

It’s also smart to review your employment rights. Some borrowers may think they are contractors or freelancers, but lenders (and the Fair Work Ombudsman) may consider you as an employee.

Since lenders often won’t allow self-employed people to borrow beyond 80% of the property value, you’ll need to save up a significant deposit. The 80% rule won’t apply to everyone, as many self-employed borrowers have substantial proof of income and well-established businesses.

How do I secure a low interest rate home loan while self-employed?

If you are a self-employed borrower and are only eligible for a low doc home loan, you may need to accept a higher interest rate. Lenders apply higher interest rates to these loan types because of the risk they are taking by lending to someone who has a higher chance of defaulting on the mortgage.

Remember that if you do end up with a high interest mortgage, you aren’t stuck with it forever. Refinancing is usually an option and you may be eligible for more home loans and improved interest rates after a year or so. By then, your business or income may be more established and your cash flow may have improved.

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To get a good interest rate from the beginning, you need to present yourself as the most ideal borrower possible. Here are some tips to help you get a lower interest rate:

  • Be responsible with your personal and business expenses: Just because some business expenses are tax deductible, it doesn’t mean these things are free! Lenders want to see self-control and responsibility.
  • Work on your credit score: Your credit score can make or break your home loan. In the months leading up to your home loan application, work on reducing any debt you have, making on time repayments and check your credit history for any inaccuracies.
  • Wait until you’re ready: Do you need to buy a property now? Or could you wait until you have a bigger deposit or when you have more tax returns to show?
  • Get help from an expert: A mortgage broker or Home Loan Specialist will have insight into which lenders and loan products are best for self-employed borrowers in your situation. Their guidance is free and you could end up finding a much more suitable home loan.

How do lenders view self-employed borrowers?

Lenders don’t view all self-employed borrowers the same way. After all, there is a big difference between a self employed borrower who owns a successful, well-established medical practice and a borrower who has an up and coming online boutique, for example.

A lot of the time, self employed borrowers’ incomes aren’t stable. Naturally, many lenders see this as a risk and may be extra picky about who they lend to. Many small businesses struggle in the first few years, but there are also many that are profitable and stable. Self-employed borrowers can expect to have fewer home loan options and fewer lenders to choose from.

What else do lenders think about when considering self-employed borrowers?

  • The property value (particularly for those refinancing)
  • Any dependents
  • Average expenses
  • Likely longevity of the business/self-employed income

What is a low doc home loan?

A low doc home loan, or a low document home loan, is one provided to specific borrowers who lack the necessary documentation that would usually be needed to apply for a home loan. Not all lenders offer these types of loans, and they are usually offered by specialist lenders.

Many self-employed borrowers will seek out low doc home loans if they don’t have at least two years of tax returns and other standard documentation.

Here are some common features of low doc home loans:

  • LMI: While regular borrowers can avoid paying Lenders Mortgage Insurance (LMI) on loans with an LVR up to 80%, some lenders will charge LMI on low doc mortgages if borrowing more than 60% of the property value.
  • High interest rates: banks charge higher interest rates to account for the risk of providing the loan.
  • No frills: often sign up incentives and certain loan features aren’t available on low doc home loans.

Getting a home loan as a freelancer or contractor

About 1 million self-employed Australians are independent contractors or freelancers. Most borrowers who fall into this category will be best suited for a low doc home loan, as they may not have access to the standard documents required for a mortgage application.

Freelancers and contractors may experience challenges getting approved for a home loan because:

  • They get paid inconsistently and pay is often based on results or per item/project
  • You are perceived as lacking stability and being higher risk
  • Freelancers may have a lot of success and income one year, and then less the next year because there aren’t as many projects up for grabs
  • You may need to meet stricter criteria to be eligible for loans.

What’s the difference between a freelancer and a self-employed person?

A freelancer is a type of self-employed worker. Banks often perceive freelancers like casual workers in that both generally don’t have stable employment. Typical freelance careers may include:

  • Developer/coder/programmer
  • Writer or copywriter
  • Designer (often graphic design)
  • Videographer
  • Translator
  • Tutor, coach or instructor
  • Accountant
  • Marketing professional

Freelancers are often sole-traders, which means that they work alone. Other self-employed people may own businesses that employ other people, such as a restaurant, plumbing service or dental practice.

How to improve your chances of getting a home loan as a freelancer

  • Keep your credit history clean
  • Avoid unsecured debts and credit cards
  • Find a lender that specialises in low doc or self-employed home loans
  • Think about consolidating any debt you have
  • Work on building your savings
  • Be responsible in your spending

Is it always harder to get a self employed mortgage?

Not necessarily! It depends on the profitability of your business, as well as how well-established it is. For example, if you are a physiotherapist and you’ve owned your own practice for 6 years, you’ll probably have a very good chance of getting approved at a good interest rate. In this case, we’re assuming that your practice is receiving sufficient business and you are financially stable.

It gets harder when your business is very new or has fluctuating levels of success. Consider waiting until things have stabilised in your income before applying for home loans, or speak to a financial advisor or home loan expert.

What if my self-employed home loan application gets rejected?

It is very unfortunate when a home loan application is declined. This usually happens when a borrower doesn’t get preapproval and isn’t seeking advice from experts. Try to avoid this by speaking to a mortgage broker who will advise on the kinds of home loans to apply for. It’s a good idea to get pre-approval and you can even get an informal approval check with Lendi’s Approval Confidence™ feature.

Unfortunately, some lenders don’t factor in the tax benefits self-employed borrowers get. For example, a tradesperson may have high costs associated with their vehicle. But, many of these expenses are tax deductible. In this case, it’s good to find lenders who specialise in working with self-employed borrowers. They’ll have more knowledge about the impact of tax on your application, as well as the complexities of being self-employed.

Now, if your home loan application has been denied, here are some steps to take:

  1. Don’t immediately reapply. Another lender won’t necessarily think your application is better, so it’s best to reassess your application and figure out what went wrong.
  2. Clarify your borrowing power. Use our borrowing power calculator to see whether you were possibly too ambitious.
  3. Work on your finances. Save, save, save! Lenders love to see evidence of genuine savings as it indicates financial stability and responsibility.
  4. Look at your credit score. Can you work on paying down some of your existing debt? Are there any errors?

Wondering how much you could borrow?

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At the end of the day, it’s not easy getting a good home loan as a self-employed person, but it can definitely be done if you are diligent about your application. Don’t beat yourself up if things go wrong and it’s always a good idea to get some advice.

Got a home loan question? Just ask!

We're here to help. Get free expert advice at a time that suits you. Choose a time to chat with a Home Loan Specialist here

The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: interest rate, home loan, lender, first home, first home buyer, new purchase, low doc, credit score

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Important legal stuff

Lendi is the trading name of Lendi Pty Ltd (ACN 611 161 856), a related body corporate of Auscred Services Pty Ltd (ACN 164 638 171, Australian Credit Licence 442372). We will never sell your email address to any third party or send you nasty spam, promise.
# Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
Lendi is a privately owned and operated Australian business. Our mission is to change the way Australians get home loans by providing a faster, smarter and more secure home loan experience designed around the customer’s convenience and needs. Although Lendi compares over 1600 products (2,500+ products including feature and pricing variations) from more than 35 lenders, we don't cover the whole market or compare all features and there may be other features or options available to you. While Lendi is 35% owned by founders and employees, we have also been supported by some great minority shareholders including Bailador, Macquarie Bank Ltd and a number of Australian sophisticated investors.
*WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rates are based on a loan amount of $150,000 over a loan term of 25 years. Fees and charges apply. All applications are subject to assessment and lender approval. Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
IMPORTANT INFORMATION: Loan terms of between 1 Year and 40 Years are available subject to lender and credit criteria. Maximum comparison rate will not exceed 14.99% (see comparison rate warning above). Any calculations or estimated savings do not constitute an offer of credit or a credit quote and are only an estimate of what you may be able to achieve based on the accuracy of the information provided. It doesn't take into account any product features or any applicable fees. Our lending criteria and the basis upon which we assess what you can afford may change at any time without notice. Savings shown are based on user inputted data and a loan term of 30 years. All applications for credit are subject to lender credit approval criteria.
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