Being self-employed can be an exhilarating experience – you get to be your own boss, set your own hours and decide how you want to work each day. However, as every business owner can attest to, there are plenty of challenges surrounding being your own boss that can take some adjusting to. One particular challenge is the ability to secure a home loan as a self-employed borrower.
Most lenders are of the opinion that self-employed borrowers typically present as a high-risk factor due to the fact they don’t generate a stable income. Some banks even distinguish between industries when it comes to the self-employed business owners. For instance, they may see a business owner in the construction business as a higher risk than an owner of a law firm. This is due to the fact that banks have seen a higher levels of loan default from certain industries over the years and therefore tend to be more conservative when it comes to their lending practices.
Getting a mortgage if you’re self-employed is difficult but not impossible. Most lenders require your finances to be stable and for you to have been in business for at least two years (ideally three) however, some banks do make exceptions.
If you work for yourself and are looking to re-mortgage or buy a new home, contact us today.
SELF-EMPLOYED HOME LOAN OPTIONS
When you are self-employed it can be difficult to obtain a home loan, however there are solutions. One possibility is a low doc loan. When you’re self-employed and can’t prove your income easily, a low doc loan may be your ‘life saver’. A low doc loan in Australia means that to be eligible for a mortgage, you don’t need to provide three years’ worth of financial statements or tax returns.
Low doc loan products are designed for lenders who have a decent deposit or income and the ability to repay their loan, but not necessarily the paperwork to prove it.
A bank will still need to be confident in your ability can meet your repayments. Generally, they will still need you to provide evidence of your income. To provide this they may ask you for:
- A letter from your accountant verifying your income
- the past two years tax returns
- Your business activity statement for the last 12 months
- Business bank statements
- Your interim financial statements
In addition to these documents you will need to provide some basic information about your business, such as its name, ABN and GST details. Low doc loans do attract higher interest rates, fees and charges as they carry more risk to the lender. It could however, enable you to purchase your ideal property at a time suitable to you. Alternatively, you could look at finding a standard home loan that only requires the most recent years tax return instead of the previous two years.
Contact us today to discuss which solution is right for you.
HOW TO APPLY FOR A SELF-EMPLOYED HOME LOAN
As a business owner you’ll be fully aware of the daily challenges of keeping your accounts, finances, and income stream on target. Although there are some addition challenges when it comes to securing a home loan, it doesn’t have to be another money problem for you to be concerned about. By being prepared and taking the right steps, you can make your transition to property owner relatively smooth. Here’s what to keep in mind as a self-employed home loan borrower:
- It’s important to know your financials: Generally, when a lender is looking at an application to buy a home, they want to see a solid degree of income. This indicates to them you will be able to meet your obligation to make repayments. It will work in your favour if you begin by having the necessary paperwork with you that validates you’ve been self-employed for a steady period of time and that you earn a regular amount of money every month. When you are self-employed it can sometimes be difficult to get all the necessary documents together to provide your income. In these circumstances there is the option to provide alternative documentation (as mentioned above in regards, to Low Doc Loans), which allows for self-employed or small business owners who cannot offer the same forms of income documentation that the large banks require.
- Be totally transparent: It’s vital that you are transparent about the ups and downs of your business from the very beginning of acquiring a loan. This is very important if there are any substantial fluctuations in your taxable income on your yearly business statements from one year to another. We are very experienced with the workings of small businesses and can guide you with any enquires or issues you may have.
- Getting on top of taxable income: Taxable income can be a big hurdle to face for self-employed individuals and small business owners. You need to think about how your business statements will directly affect your future borrowing options. This is where getting help from a professional about your objectives when working out your taxable income can be very beneficial.
- Being cash flow smart: Using a financial plan to make the best of your cash flow can be helpful for people who are self-employed. It will positively impact your cash flow if you can pay off any outstanding debts such as credit cards or personal loans. Lenders will look favourably on this behaviour.
Keep in mind, these are just ideas to assist in the planning of your self-employed home loan application and there are various other choices for self-employed individuals looking to break into the property market. Our team would be happy to discuss your options at a time convenient to you.
FEES AND INTEREST RATES
Whether you’re applying for an owner/occupier home loan or investment loan you want to lock in the best interest rate with the lowest fees. However, keep in mind that if you choose a low doc loan, you will incur a higher interest rate, fees and charges than a standard variable loan.
When it comes to interest rates, many lenders offer very competitive packages, fixed and basic loan discounts on their rates, regardless of how the loan is structured.
You can expect to get a discount of between 0.5% and 0.85% off the Bank Standard Variable Rate for most loans, depending on the loan amount and lenders that you qualify with.
When you work with Mortgage World we can quickly assess your situation and determine which lenders can not only approve your application, but which loans will save you the most money as a self-employed business owner.
ADVICE, TIPS AND CONSIDERATONS
If you’ve been previously employed, keeping old payslips and getting references from your former employers can help speed up the home loan process.
FREQUENTLY ASKED QUESTIONS
What length of time do I need to have been in my own business for?
In order to qualify for a self-employed home loan, most banks and lenders require that you’ve been self-employment for a minimum of two to three years, however there are banks known to consider individuals working as their own boss for just 12 months. For that reason, it is always advisable to a mortgage expert to consider your options.
Will I be considered if I’ve been self-employed for less than 24 months?
A small group of lenders will grant loans for self-employed as business owners people for periods of 12 and 24 months on the provider they have worked in that industry for a good period of time, with at least a year’s financial records for their newly established business. For instance, as way of an example take an electrician with her own business. Providing she had been operating as a business owner for 12 months and had been employed as an electrician for at least a five-year period prior to becoming self-employed, she would be eligible to apply. However, if you’ve been in business for less than 12 months, there aren’t many options. A business that ‘young’ provides too much uncertainty to lenders.
Do banks make mistakes and which ones?
When it comes to calculating the income of self-employed people looking to borrow for a home loan, mistake can often be made. As mortgage experts we look at these aspects thoroughly and should the need arise, we can contact an assessor and go through the details ensuring that the loan can be assessed correctly.
The issues we see most commonly include:
- Company car: Lenders often disregard the benefit a self-employed person receives from tax deducting their car expenses in their company. We will be able to stay on top of this for you.
- Double dipping: Occurs where the bank considers an income two times (for instance accepting money paid to a CEO and also Net Profit Before Tax) or factors in an expense twice. This could occur for instance if they forget to add the interest back on loans.
- Procrastination: If the loan you’re apply for is complex, some loan assessors at the bank may put off assessing your application. If needed, we will usually be able to have a chat with bank’s management and ask them to give your loan to a more experienced assessor.
Because we are aware of these mistakes we can work to ensure they don’t occur with your application.
CALL THE FINANCE EXPERTS
At Mortgage World Australia we don’t believe you should be penalised for being a self-starter and running your own business. It’s our aim to provide you with the same opportunities of purchasing your own home as anybody else.
We have the experience and expertise to quickly assess your situation and determine which lenders can approve your application. We know which loans will save you the most money and which lenders are less conservative when assessing their self-employed loans.
Contact us today to discuss your options with one of our finance experts.