A growing number of Australians are choosing to sack their boss, quit their day job and go out on their own. The appeal of being self-employed means choosing the hours you work, making all the decisions on your own, and enjoying the freedom of not having a boss.
Unfortunately, being self-employed also means accepting a few extra challenges when it comes to borrowing money. Self-employed people still have access to all the same mortgages as salaried people, but the banks may require additional information rather than simply handing over your last pay slip to verify your income.
If you’re finding it challenging to qualify for a mortgage as a self-employed person, here are some tips that could make things a bit easier.
Qualifying for a self-employed home loan
The majority of lenders in Australia will happily lend money to self-employed people, as long as you can verify your business income is stable and is sufficient to cover your financial obligations.
In order to qualify for most regular self-employed home loans, you’ll need to provide some information that includes:
- Your last 2 years individual and business tax returns
- Your Australian Business Number (ABN) verifying that you’ve been trading for at least 2 years
If your last tax return is already 5 or 6 months old, you may also need to provide recent Business Activity Statements (BAS), verifying cash flow is steady and consistent throughout the current financial year.
As long as you’re able to verify your income with the right financial documents, you’ve been self-employed for at least 2 years and you have a good credit history, the banks may give you access to the same types of home loan products as a salaried person.
Self-employed Low Doc home loans
If you’re like many self-employed people, it’s likely you’ve set up your business for tax efficiency. As a result, your tax returns may initially appear as though you don’t earn sufficient income each year to qualify for the home loan amount you want.
You might also not have completed your latest tax return yet, so the documentation you have to show the bank may be out of date. Alternatively, you might have had some one-off costs that reduced your business profitability in the last financial year, so your numbers look worse than they really are.
If this is the case, you may need to consider a Low Doc home loan, which looks at other ways to verify your business income.
Low Doc home loans are intended specifically for self-employed borrowers who don’t have current tax returns or who are unable to provide full financial statements. You have the option of declaring your income on an Income Declaration Form.
Some lenders may ask you to prepare supporting documentation that helps demonstrate your ability to keep up with your loan repayments. For example, some may request documentation from your accountant or a Profit and Loss statement plus other information that could support and strengthen your application.
What is different with a self-employed home loan?
In most cases, a home loan for a self-employed person should provide the same loan facilities as any other mortgage. You can use your home loan to buy a home to live in or purchase a rental property. You can choose between a variable or fixed interest rate. You can even opt to link a 100% offset account to your mortgage if you wish.
However, one of the most obvious differences between a self-employed home loan and a mortgage for a salaried person is that the interest rate is sometimes a little higher than traditional loans.
While the interest rate might be slightly higher at first, keep in mind that many lenders will give self-employed people the option to switch over to a traditional loan after a period of time if you’ve kept up with all your repayments on time. Once you’ve switched over to a regular home loan, your interest rates will drop accordingly.
Another difference with self-employed home loans is the deposit or equity amount required. Most lenders will limit the amount you can borrow to a maximum of 80% of the property value.
If you’re self-employed and finding it difficult to qualify for the home loan you want, call an Assured finance consultant and ask how we can help. We have access to a range of different lenders that could help you get the finance you need.
This article provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such as it does not take into account your personal circumstances or needs. Professional advice should be sought prior to any action being taken in reliance on any of the information.
