When looking to get a new home in Australia, you may find many of the home loan application process daunting if you’re self-employed. Many lenders will request evidence of regular income, which usually comes in the form of payslips, which can be harder to present for self-employed people like freelancers or business owners.
It’s entirely possible for Australians to get home loans as self-employed borrowers, but it may take a little bit of extra preparation. Let’s dive into just how that works.
How do I get a home loan if I’m self-employed?
Most of the time, applying for a home loan as a self-employed person works very similarly to most other home loan applications — if you have the necessary documentation to back up your financial situation.
You’ll choose the home loan you’re interested in and decide on your loan amount - based on your borrowing power, either on your own or via a mortgage broker. This is where you will look for the interest rate and loan features that suit your needs, checking the comparison rate for a more accurate idea of the interest rate you will pay with fees factored in.
At a point in your home loan application, you must demonstrate your income. For sole traders and small business owners, this is not as straightforward as presenting a payslip.
Lending criteria may be slightly stricter for self-employed borrowers and those with their own businesses. This is because lenders may see self-employed people as having a higher risk of making their loan repayments.
What supporting documents do I need for a self-employed home loan?
Depending on the lender, the financial statements and documentation required of you will differ.
Like anyone looking to get a home loan, you will need:
- A credit check (this is how your lender will determine creditworthiness and will consider your whole credit history, including any liabilities and credit card or personal loan debts).
- Bank statements (this functions as evidence of genuine savings).
- Record of any assets (any investments or investment properties, vehicles, existing property value, etc.).
Beyond that, when you’re self-employed, a few more things you will need that fall under the banner of “income”. These may include:
- Last two years of personal tax returns. Your lender will view to ensure they are complete with notices of assessment and a check for abnormalities.
- Last two years of company tax returns (mainly you are a small business owner).
- Last two years of other financial statements and business activity statements (including loss statements, profit statements, and any other relevant documentation from the past two financial years).
- ABN and GST registration date with the Australian Tax Office (ATO).
Along with any add-backs, these will be used to work out your income, separate from your taxable income. This is essentially aiming to create a record of consistent earnings, which makes you a less risky prospect to a lender.
Low-doc home loans
Low-doc home loans (or low-documentation home loans) are another loan type that self-employed borrowers might use as they don’t require the same large amount of documentation of a regular owner-occupier home loan product.
These can be helpful if you have only been a sole trader for a short period or don’t have the documentation to demonstrate your taxable income.
However, low-doc home loans come with some significant considerations to remember.
Low-doc home loans are not allowed by every lender, but some may. There may make it easier for many self-employed people to get home loans.
However, low-doc home loans can have significantly higher interest rates than comparable variable-rate or fixed-rate home loans. This is because they are considered relatively high risk by lenders.
There may also be a higher barrier to lenders mortgage insurance (LMI) for those on low-doc home loans. LMI is a charge on borrowers, traditionally those who have a deposit on their new home of below 20%. With low-doc home loans, the barrier for LMI can be as high as 40%. This means that you may need to start your loan for your first home with a loan-to-value ratio (LVR) of 60% if you’re looking to avoid LMI payments.
