It’s the great Australian dream for many: giving the 9-to-5 grind the flick and running your own show. But when it comes to taking out a home loan, being your own boss can dish up some unexpected hammer blows.
Rightly or wrongly, lenders tend to see self-employed borrowers as a higher risk compared to employees. That’s largely because, by and large, their income isn’t as guaranteed.
In addition, it’s likely their earnings won’t be the same each pay day – they may differ, sometimes substantially, from one month to the next.
In a lender’s eyes this has the potential to impact their ability to make regular loan repayments.
So if you own one of Australia’s 2.6 million small businesses, or you’re one of the nation’s one million independent contractors, here are some tips on how to convince a lender to back you.
Show you’ve been in business for a while
Banks often feel more comfortable if you have been self-employed for a while.
That can mean showing you’ve held your Australian Business Number (ABN) for at least a year or two. It demonstrates the business has got legs and possibly generates a reasonable income for you.
Gather proof of income
While employees can simply stump up a couple of pay slips as proof of income, if you’re self-employed you’ll likely need to pull together several pieces of paperwork as evidence of income.
The requirements vary between lenders.
You may be asked to provide your last two years of financial statements, including business and personal tax returns (a good incentive to stay up-to-date with your tax!).
Or the bank may just want to see several recent business activity statements.
In some cases, you may be asked for an income statement signed by you and your accountant that confirms your financial position and that you can afford the loan repayments.
With so much variation, it’s important to speak with us to know what different lenders look for.
Showcase your other assets
It’s not a bad idea to gather evidence of personal savings and investments.
A healthy track record of regular saving, in particular, can go a long way towards convincing a lender that you can handle home loan repayments.
Don’t hide your income or exaggerate expenses
The Australian Tax Office (ATO) estimates that about 10% of small businesses under-report income (aka cash-in-hand jobs) or exaggerate/overclaim expenses.
Not only can this get you in hot water with the ATO, but it can also impact your borrowing capacity.
That’s because generally speaking, the lower your income, the lower the repayments a lender may expect you’ll be able to afford each month.
Low-doc loans for self-employed home buyers
You may have heard about low-doc home loans.
These are purpose-built loans designed for self-employed borrowers who don’t have sufficient documents to apply for a regular home loan, hence the name “low doc”.
The beauty of low-doc loans is that they can provide a pathway into the property market.
The downside is that with less proof of income, the bank may see you as higher risk. And that can mean paying a higher interest rate.
The good news is that the higher rate may not apply for the life of the loan.
If you build up a record of reliable loan repayments, the bank may let you convert your mortgage to a full doc loan at a later stage, potentially providing the savings of a lower rate.
Not every lender offers low-doc loans. Talk to us to know which, if any, low-doc loans are suitable for your circumstances.
Get the ball rolling
Borrowing to buy a home may involve a little extra effort when you’re self-employed but it can be done.
And if you’ve created a successful business with a strong track record of generating a profit and income for yourself, the process can be straightforward and result in you landing a regular ol’ home loan.
The catch is that running your own show is likely to mean you’re stretched for time to put the application together.
If that sounds like you, give us a call. We’ll help take care of your home loan while you’re taking care of business.