You may find it challenging to get loan approval with your self-employed status, but there are pathways to maximise your chances of getting approved.
In this blog post, we break down all the home loan products available for self-employed borrowers and discuss the best strategies for securing approval.
Can You Get a Home Loan If Self-Employed?
If you are a self-employed person and are your own boss, most banks and other lenders covered by an Australian Credit Licence will treat your application with a more conservative approach.
Some self-employed professionals working as consultants, contractors, or freelancers have high-paying jobs in the IT, healthcare, and mining industries. According to findings by IBIS World, nearly 80 per cent of workers in Australia’s financial services, construction, farming and photography industries are self-employed. Nonetheless, banks and non-bank lenders consider the financial situation of self-employed people to be less stable than employees working full time. These factors have a bearing on how they treat your home loan application.
Many lenders view some industries cautiously, even within the self-employed category of home loan applicants. This is due to higher defaults in home loan repayments in these industries. Your bank or financial institution will conduct a thorough assessment of your home loan application if you are a business owner. The big differentiator if you’re self-employed is how you prove your taxable income.
Several home loan solutions are suited for self-employed borrowers who are financially stable but do not have the regular documents required to apply for a home loan.
Low Doc Home Loans
Low documentation (low doc) loans are created for borrowers who cannot furnish their financial records - including two full years of personal tax returns - required as part of the standard home loan application process.
The borrower’s income details are confirmed using a self-verification process for low doc loans. You also have to sign a declaration document outlining your source of earnings. Your lender will assess your application using this declared income, and you can borrow a loan amount of up to 80% - 90% of your property value. A low doc loan offers flexibility, ideal for freelancers, contractors, consultants, small business owners and home buyers who have a stable income and assets but cannot provide routine paperwork such as tax returns or financial statements.
Responsible Lending
Lending criteria apply for your low doc loan, and you may or not qualify for the loan. Suppose you are a hairdresser and have been self-employed for around a year but have worked as an apprentice for nearly 5-6 years. Some lenders may approve your application considering that you’ve been in the same field of work for a significant time, although your books are relatively limited.
Lenders prefer seeing a sound record of business’ financials. Creating a solid business and credit history improves your chances of getting approved for a low doc loan best suited to your needs.
Who Can Qualify For a Self-Employed Home Loan?
To get a home loan more efficiently, you should ideally be self-employed for two to three years. Still, some lenders would be open to assessing and considering your application even though you have been self-employed for only one year!
Self-Employed for Less than 1 Year
If you have been self-employed for less than one year, your chances of getting approved by most banks are little. This is because you do not have any tax returns to submit, which is further compounded by the financial uncertainties of new businesses. You could look for lenders willing to consider the taxable income from the last job. The idea is to show lenders that you can always return to that same salary level if you have to shut shop and get re-employed.
It will help you assure them of capacity for principal and interest repayments and help you borrow a loan amount of up to 80% of your property value. In addition, during the pandemic, some lenders even reduced the period to between six and twelve months of business records and profits to qualify for a home loan.
Self-Employed for 1 to 2 Years
Some lenders offer self-employed home buyers loans if they have been in the same field of work for a while now.
In most cases, you will be able to borrow loan amounts of up to 95% of the property value if you can provide one or two years’ financials for your new business.
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Home Loan Documents Required for Self Employed
As every home loan specialist will tell you, proper financial records, stable income, business growth, and increased earnings over a long-term period are crucial to getting your loan offer.
Standard Documentation
If you're planning to apply for a home loan, there are standard documents you would need to organise. These include:
- Proof of ID: At least one primary document (passport, Australian driver’s licence or learner permit) or at least two secondary documents (Australian birth certificate, citizenship certificate, medicare card, ATO assessment notice which is less than 12 months old)
- Proof of Income: Includes employment contract or letters, payslips, bank statements showing salary credits for the last three months, tax returns, and ATO Notice of Assessment not older than 18 months
- Financial Position: Lenders want to know if you own assets (shares held, vehicle, superannuation) and the extent and status of your liabilities ( car and personal loans, credit history, investment loan and any other debts)
- Living Expenses: Lenders will request a breakdown of your monthly expenses to assess if you can manage your home loan interest repayments. Typically, your monthly outgoings on transport, groceries, gas, water, electricity bills, childcare, healthcare, entertainment, internet bills etc., are assessed.
Evidence of Self-Employment
When you’re a sole trader or self-employed, the documents needed to assess your application for a home loan will typically include:
- ABN: Proof that ABN (Australian Business Number) is registered for two years and/or Certificate of Incorporation, issued by the Australian government certifying that your company is registered to trade.
- Borrower’s income declaration: You will have to supply a signed document confirming your income as lenders need proof of your repayment capabilities.
- Business activity statements: Your Business Activity Statements (BAS) must be ATO-verified from the last 6 to 12 months.
- Business and personal transaction statements: Company tax returns, financial statements (such as P/L statements and balance sheets), and personal tax returns of two years or a minimum of six months will need to be shared with your lenders for assessment.
- GST registration: You can register for GST at any time. It is essential to register if your business is en route to a turnover of $75,000 or more per annum.
Getting Approved for a Home Loan
While the road to approval for a self-employed home loan may be challenging, there are ways to enhance your chances of getting a loan offer:
1. Increase Your Deposit
Putting down a good deposit amount can better your prospect of getting approved for a loan. It reflects your financial stability and discipline. Lenders are more inclined to approve lower-risk self-employed customers.
A bigger deposit reduces your (LVR) loan-to-value ratio and improves your chances of getting a fast home loan approval. For example, if your Loan to Value Ratio (LVR) is 80%, meaning 20% is your deposit, and you need to borrow the remaining amount. Paying up to 20% or more of property value will spare you the hefty LMI expense.
2. Maintain Proper Records of Your Assets
During assessments, your lender requires you to examine assets declared by you. Maintain a thorough and accurate list of your assets, equity, and even asset write-offs. Recent bank statements, investments in stocks, rental properties, and other assets should be furnished. The more information you can supply, the better your chances of approval.
3. Show a Good Credit Rating
Irrespective of your employment status, a good credit rating sets you in a better place with your lender. While assessing your application, banks and lenders run checks on your credit history to see your cash flow situation and your capability to manage repayments.
Credit criteria may vary. You may also have to show your business credit cards and the invoices received and issued for the past three months. Ensure that your unpaid debts are cleared and you repay your dues on time for a good credit rating.
4. Establish Your Business
Opting for a home loan early in your business may not be the best idea yet. It may help to hold on to your dream of a new home until your business is more well established and you have the documents to support your application.
Your chances of getting a self-employed home loan is best when all the documentation, such as tax assessment, net profit, business tax returns etc., are thorough and you have sufficient proof of income.
5. Know Your Self-Employment Rights
Some lenders consider contractors or sub-contractors as employees, which may influence how they assess your application and lending solution.
Benefits and Limitations of Self-Employed Home Loans
Self-employed home loans come with their own sets of pros and cons. Being aware can help you make informed decisions about your home loan.
Advantages of Self-Employed Home Loans
- Opportunity to get approved: As a self-employed borrower, securing a low doc home loan can help you purchase your new home where you may have been ineligible for standard home loans.
- Transfer to full doc: After 2-3 years, many lenders will allow you to convert your home loan to a standard home loan. This opens opportunities for better interest rates.
Challenges of Self-Employed Home Loans
- Interest rates are higher: Some lenders place self-employed borrowers in the high-risk category due to the unstable income in businesses. As a result, you may be charged higher interest rates.
- Bigger deposit: You may have put down a bigger deposit than full-doc borrowers since lenders prefer lower LVR for self-employed home loans.
- LMI expense: Most lenders will not charge extra rates for your low doc loan. However, they may levy Lenders Mortgage Insurance (LMI) one-time fees when setting your loan. LMIs are usually applicable for loans exceeding 60% of the residential property value. Some lenders may ask for a minimum 40% deposit to avoid LMI.
- Reduced bargaining power: Some banks and lenders do not offer self-employed home loans. This effectively reduces your choices and bargaining power to get a loan at a lower interest rate, making your search more challenging than it would otherwise appear.
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Lenders Offering Self Employed Home Loans
You can choose from several variable rates, fixed rates and other loan options with add-ons such as redraw and offset accounts to get a loan that matches your budget requirement.
Here are some products by leading banks.
ANZ
Self-employed customers can access the standard range of home loan products and have to pay the same interest rates as customers earning a salary.
- ANZ Standard Variable (2.99% p.a. principal and interest) (2.99% p.a. comparison rate): Offers flexibility with redraw, offset accounts, and extra repayment features.
- ANZ Fixed Rate (3.99% p.a. principal and interest) (3.17% p.a. comparison rate): Offers you the benefit of fixed repayments and a wide range of loan terms to choose from.
- ANZ Simplicity PLUS (2.29% p.a. principal and interest) (2.30% p.a. comparison rate): Offers competitive variable interest rates, redraws, and lets you make extra repayments.
CommBank
If you’re self-employed, you may be eligible for CommBank’s simplified income verification process without showing your company’s and/or personal financials.
- Extra Home Loan: (2.19% p.a. variable rate with discount margin offer) (2.20% p.a. comparison rate): A low variable interest rate, low fees and flexible features and minimum new borrowings of $10,000, among other attractive features.
NAB
- Basic Variable Rate: (2.19% p.a. variable rate) (2.23% p.a. comparison rate): Is among the lowest rates offered by the bank and has no application or ongoing fees. Features and benefits include unlimited additional repayments and unlimited redraws ($500 minimum) if you're paid ahead.
- Variable Rate with Offset : (3.67% p.a. variable rate) (4.08% p.a. comparison rate): Features and benefits include access to an offset account, unlimited additional repayments and a suite of attractive discounts and benefits along with the NAB Choice Package
- Fixed Rate: (3.99% p.a. fixed rate) (4.34% p.a. comparison rate): Features and benefits include repayment certainty during the fixed term, ability to pay ahead during fixed term up to $20k and attractive discounts and benefits along with the NAB Choice Package
Westpac
Self-employed customers can access Westpac’s range of home loans, with the same benefits available to PAYG customers.
- 2-Year Fixed Rate: (3.79% p.a. 2-year fixed rate) (3.79% p.a. Comparison rate): Features 2 Year Owner Occupier Fixed Interest rate, P&I repayments with Premier Advantage Package subject to T&C.
- Variable Rate: ( 2.19% p.a. variable rate) (2.20% p.a. Comparison rate): Features 1.74% p.a. discount for the life of the loan. P&I repayments, New Owner Occupier loans. Does not include refinances within Westpac Group.
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