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.
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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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.
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.
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:
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.
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:
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.
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:
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:
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:
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.
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.
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:
Calculate your borrowing power based on your income.
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.
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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.
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