Being self-employed comes with several advantages – you don’t have anyone to report to, you have flexibility with your work hours, and the arrangement can be both personally and financially rewarding.
When it comes time to purchase a home, the benefits can often end. Due to their financial stability and difficulty understanding them, banks and traditional lenders may not be able to lend money. A loan is more difficult to get for a self-employed person than for regular salaried workers.
However, being self-employed does not mean your homeownership dreams are over – it just means you may need to put a little more effort to get a mortgage approved.
These are the basics to help you get a loan for your self-employed business if you have quit the 9-to-5 grind to be your own boss.
1. Who is self-employed?
The Australian Taxation Office (ATO) considers you self-employed if your business is registered as a partnership or sole trader, company trustee, corporation, or company. Contractors can be considered self-employed when the contractor contributes to their superannuation, or manages their PAYG obligations.
2. What are the requirements to be eligible in order to get a loan for my home?
Lenders require that your business be in operation for at least two years before they will approve you for a loan. If you are looking to refinance your mortgage, this is also required. Because lenders have two years worth of tax and financial data to evaluate your borrowing ability,
If you have been self-employed for less than two years, you can still get approved for a mortgage. There are however some compromises. These compromises include higher interest rates, and the requirement to deposit more. There might not be many lenders willing to grant loans. Your best choice is to go to specialist lenders who only lend to self-employed borrowers.
3. What documents do you need to submit for a mortgage from a lender who is self-employed?
Although lenders may have different requirements than you, they will still require the following information from you:
- Two years’ tax returns and assessment notices
- Self-certified income declaration, or accountant’s statement
- Statement of Business Activity (BAS).
- Evidence of Australian Business Number, and GST registration
- Included are the past three months’ bank statements, including statements for credit cards, transactions accounts and statements that prove timely repayments.
- Completely executed contract for sale
4. How do lenders calculate my income?
Lenders will not accept regular payslips. They will instead examine your tax returns to determine how much you make. Different lenders have different ways of going about this process – some get their estimates by averaging two years’ worth of income while others opt to take the lower income figure and run with it. Some lenders will write-off expenses to your tax returns.
These potential “add-backs” include:
- Contributions to your superannuation fund
- Depreciation for your taxable assets (such as vehicles and investment property)
- One-off expenses can be deducted, such as work-related expenses.
- Net profits are retained in a company
- Interests on personal and business loans
5. What is the maximum amount I can borrow?
Lenders might offer self-employed borrowers similar loans as regular wage earners if they have the exact same income and financial needs. This means up to 80% of the property’s value without having to pay lender’s mortgage insurance. Lenders will not allow you to borrow more than 60% of the LVR.
You can use the borrowing power calculator to estimate how much you could borrow.
6. Do you think it is best for me to apply as a self-employed individual for a home loan?
If you have your finances in order and all documentation ready quickly, you might be able to get a loan for your home. There are downsides to home loans, including higher interest rates and larger deposits. There are limited options for lenders. A professional mortgage broker can provide sound advice to help you determine if this route is right for you.