Applying for a home loan looks slightly different when you’re self-employed. Don’t panic, though. It can definitely still be done. You just need to understand what the banks will be looking for, and what documentation you need.
Why are loan applications different if you’re self-employed?
Lenders want to know that your income is secure so that you’ll be able to pay back your home loan.
Self-employed people are seen as higher risk. They don’t receive a set salary, or have an employment contract that sets out their entitlements. Research from the Australian Bureau of Statistics shows that non-employing businesses (sole traders) have only a 60% survival rate over 4 years.
The last thing the bank wants is to lend you a large sum of money, only for your business to fail a few months later.
On the other hand, there are a lot of self-employed Australians out there. 2016 Census data shows 1,448,121 small business owners (employing between 0 and 19 people each), with an estimated further 1 - 1.5 million working at least some hours per week in casual ‘gig economy’ work.
That’s a lot of people who may want a home loan.
At the core of every loan application is a fundamental requirement to prove you’re a safe investment. For a self-employed person this means providing information relating to the success and security of your business.
What documents the lender requires
At the heart of any loan application is the need to prove that you’re a safe investment.
For a salaried worker, that means demonstrating that you have a steady income that exceeds your expenditure, and you have responsible savings habits.
For a self-employed person, your financial security is dependent on the security of your business. If it fails, you’re without income. Accordingly, the bank will want to see financial information relating to your business as part of your application.
You’ll need the same paperwork as a salaried applicant, which includes:
You will also need financial information from your company, including:
Due to the COVID-19 pandemic, some industries (such as tourism or hospitality businesses) are now considered higher-risk even if you can show strong revenue for many years.
Your lender may also therefore require a letter from your accountant stating that COVID has not affected your business, or that any downturn has been very temporary.
Due to COVID-19 your lender may require a letter from your accountant stating that COVID has not affected your business, or that any downturn has been very temporary. Featured here: Amberley, Meridian Estate, Clyde North.
What if I don’t have the right documentation?
There are a few reasons why this may be the case. You may have only recently become self-employed after having learned your trade working for someone else. Another possibility is that your business may have been around for a few years but only recently hit a high growth phase, so previous tax returns don’t reflect the current profit and loss.
Lenders may deal with this scenario differently depending on their internal lending guidelines and the industry you’re in.
Firstly, speak to a mortgage broker about different lender requirements. Some lenders only want to see one year of full financials, while others want two or even three.
One possibility is a ‘low-doc’ loan, meaning low documentation. These loans can be ideal for people whose businesses are heading into a strong growth trajectory, but who don’t quite have the paperwork in order yet. Under this category, lenders may accept quarterly BAS statements and/or a signed declaration of your current income in lieu of tax returns and statements.
Low doc loans are perceived as higher risk for lenders. Therefore, there are a couple of catches.
Firstly, you’re unlikely to get a low doc loan if you don’t also have a large deposit or other equity. Most will only loan you up to 80% of the property’s value, and so require a minimum deposit of 20%. They may also require you to take out lenders’ mortgage insurance (LMI) if you are borrowing over 60% of the property value.
Secondly, they are typically higher interest loans. A low doc loan is usually at least 1% and can be up to 2% higher than a standard fixed rate loan.
However, many self-employed people choose to secure their mortgage this way. You can then refinance in a year or two when you have a more substantial history for your business. The process may cost you a little more in repayments overall, but allows you to get onto the property ladder and start building equity without having to wait.
A low documentation loan may mean you spend more in repayments overall, but if you’re self-employed it’s a good way to secure a mortgage and will allow you to enter the property market sooner.
For more information about applying for a home loan, go to the Financial Services section of our website or speak to one of our friendly loan specialists on 1300 978 051.