Since most lenders want to see a stable employment track record, accessing home loans for small business owners and contractors isn’t always easy.
Starting your own business is a gamble at any time, particularly if you are thinking about leaving a job where you are an employee to work for yourself. While the perks of being self-employed is usually considered to be the nature of the work itself, the process also involves taking on risks that need to be weighed up against the potential rewards.
The reality is that self-employment often means earning an irregular income. There may be periods where you are very busy with clients and other times where you experience a lull in work. The irregularity of your pay can make settling regular bills and loan repayments difficult, which is why obtaining self-employed home loans can be tricky – but not impossible.
If the data is anything to go by, the entrepreneurial spirit is certainly still alive and well in Australia. According to the National Skills Commission, more than half of Australians think there are good opportunities to start a business and almost half believe they possess the skills to do so.
In addition, it turns out that there’s plenty of people who are already trying their hand at self-employment. About 10.6% of Australia’s workforce – or a whopping 1.388 million people – worked as owner-managers of enterprises with no employees as of February 2021, with many more owning thriving businesses with a number of staff.
However, the true definition of being self-employed in Australia goes beyond the scope of a small business owner. Technically speaking, a self-employed person can be anyone from a gig worker who drives Ubers or an independent contractor servicing one or more companies or clients. In addition, it is possible to be both self-employed and employed by another business at the same time, such as when engaging in the gig economy or contracting work on top of regular employment.
When you’re self employed, you may have a greater range of tax deductions available.
When you’re self-employed, you may have a greater range of tax deductions available. Many of the costs that directly relate to earning your taxable income may be considered business expenses, which can be claimed on tax. Such expenses may range from advertising costs and business insurance through to the work-related portion of the cost of a new car or IT equipment.
A major downside to these benefits is that as there’s no employer to handle all of the tax stuff, a self-employed person is the one who is responsible for meeting these obligations. Possibly one of the biggest drawbacks of self-employment is that you’ll also miss out on the paid benefits that employees enjoy, such sick leave, paid annual leave and accrued superannuation. When you are your own boss, if you’re not working, you’re not earning – and that can make it challenging to allow yourself time to recuperate after illness and limit your ability to take long holidays.
Being self-employed isn’t always going to be smooth sailing, but many people identify with the appeal of being your own boss, setting your own schedule and having the capacity to do what you love. For those that are able to find success via this avenue, the payoffs can be lucrative. Providing that you’re able to prove this on paper, it can also unlock options for self-employed home loans.
The term ‘self-employed’ is certainly a broad one and covers a wide variety of workers who identify as a freelancer, an independent contractor, a temporary worker, a seasonal staff member and, of course, those who own and operate businesses.
Accessing home loans for self-employed applicants can be a tricky business to navigate. Many banks are wary of the perceived instability that this form of work is linked to and to even be considered for a mortgage, self-employed applicants are required to submit a significant amount of paperwork when compared to an application from someone who is employed in the more traditional sense.
Above all, banks and lending institutes value stability, and fluctuating income streams can translate as a risky gamble – and not one that all lenders are willing to take. As a PAYG worker, you may require no more than one payslip before being able to get a loan approved. In contrast, a self-employed person needs to jump through twice as many hoops to prove that they not just have a stable income, but have future plans in place to ensure that the income isn’t going to change.
Thankfully, there are options for self-employed applicants that aim to assess these types of applicants on a case-by-case scenario, to get a fair and accurate picture of their financial health while still mitigating financial risks on behalf of the lending institute. While not every bank or lender will accept self-employed applicants in their credit policy, the good news is that if you’re able to show the right types of documentation, access to a mortgage as a self-employed person isn’t as difficult as it’s made out to be.
Low documentation loans (or low-doc for short) provide flexible financing solutions for self-employed people. Low-doc loans are designed for customers who have an income and assets but are unable to provide the usual verification documentation like financial statements and, in some cases, tax returns.
Typically, low-doc home loans are a unique mortgage product that are aimed at self-employed people and people who run their own businesses.
Self-employed home loans may need a deposit of at least 20%.
As a general rule, lenders consider self-employed home loans to be risky, so it may be the case that you need a deposit of 20% or more to purchase a property. This is quite the contrast to a standard residential home loan, where a lender may be willing to offer a mortgage to borrowers with a deposit as small as 5% or 10%. Alternatively, some lenders may charge low-doc borrowers a higher interest rate on smaller deposits.
Despite the name, low-doc home loans do require quite a bit of paperwork, as applicants need to provide evidence of their income outside of the standard documents that lending institutes typically ask for.
While the submission of all relevant documents plays a big role in any standard mortgage application, this is even more important when applying for self-employed home loans. A lack of understanding is often a key reason why a bank or lending institute will decline this type of loan, particularly with complex trust structures and bank staff that lack the experience to understand the full scope of your business and its relevant income.
Essentially, self-employed home loan applicants need to do everything they can to present themselves as financially stable earners and it’s for this reason that many choose to partner with an experienced mortgage broker to help them navigate their options.
Most lending providers require self-employed applicants to have at least two years of earnings and experience under their belt from this type of working status, purely to ensure your income is stable and established. Alternatively, some will consider applicants who have been self-employed for as little as one year or sometimes even sooner, providing they have previously worked in the same industry or sector prior to going out on their own.
As a general rule, lenders will ask for your old tax returns as a means to provide insight into how much you actually earn. Although the exact income extraction methods vary from lender to lender, the aim of the game is to calculate whether your income is stable or not. Some institutes will base their estimates on your lowest income figure, whereas others may use your most recent tax return, and some use the average of the last two years.
When presenting your application, it’s also important to factor in things classed as ‘add backs’. Lending institutes will sift through your tax returns with a fine toothed comb, and add backs are generally classed as expenses that may reduce your taxable income but are not defined as ongoing. Examples of these can include –
Needless to say, the way you present yourself financially as a self-employed applicant can make or break your chances at getting pre-approved for a home loan. While specific home loans for self-employed applications are often available via ‘low document loans’, they still require a significant amount of evidence and paperwork to be submitted with your application, with the primary documentation required including the following –
Some lenders may also request or accept a letter from an accountant, certifying that the accountant knows the details of your financial position and can confirm that the information you have provided about your annual income is true. This letter must be signed and dated by the accountant, must be on the accountant’s letterhead (unless the accountant is signing a low-doc declaration provided by the lender), and must include details of how long the accountant has acted for you. To help you present this information in the best possible light and get the all important pre-approval, partnering with a mortgage broker is a must.
Home loan navigation can be challenging, particularly when you’re unsure about the right choice for your needs. Fortunately, teaming up with a mortgage expert ensures that you have a knowledgeable ally to guide you through the process.
If contemplating your financial future resonates with you, now may be the perfect time to consult with a professional. Whether you’re seeking mortgage solutions or in need of a financial fairy godmother, the cohesive team at Madd works collaboratively to transform your aspirations into actual
achievements.
Home loan navigation can be challenging, particularly when you’re unsure about the right choice for your needs. Fortunately, teaming up with a mortgage expert ensures that you have a knowledgeable ally to guide you through the process.
If contemplating your financial future resonates with you, now may be the perfect time to consult with a professional. Whether you’re seeking mortgage solutions or in need of a financial fairy godmother, the cohesive team at Madd works collaboratively to transform your aspirations into actual
achievements.
From buying your first home to refinancing, commercial or construction loans – our free service takes the stress out of getting finance. We offer our services Australia wide so why not reach out to us today. We’d love to hear from you.
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