The simple truth about home loans for the self-employed
You may have heard that it’s hard to get a mortgage if you’re self-employed. The truth is that it can be more difficult, and your options may be more limited than if you were an employee.
But there’s still every chance that you’ll be able to get a home loan.
Why is it harder to get a mortgage if I’m self-employed?
Lenders aren’t just being difficult on this (honest). Under Australian financial regulations, lenders must make sure you can afford your repayments before they are allowed to offer you a loan.
But unlike someone who gets a regular pay cheque, your business income may vary from month to month. Therefore:
- Lenders will need to look at your profit over a period to assess how much you can afford to borrow.
- You’ll need to prove what your business earns, which means having your paperwork in excellent order.
How will the lenders decide how much I can borrow?
Generally, lenders will want to see two years’ financial statements for your business. Most will base their calculations on the lowest year’s profit, although some will use an average of your earnings over the two years.
Here’s the pitfall: as a business owner you probably do all you can to minimise your taxable income. That’s great for cutting down your tax bill – but when it comes to applying for a loan, the lower the income on your tax return, the less you’ll be able to borrow.
So if you’ve claimed some big one-off expenses or items like depreciation that don’t affect your bottom line, make sure you’re ready with an explanation and evidence to show your lender how much you actually earned.
What if I can’t get the paperwork together?
If you can’t provide two years’ financials for your business, don’t despair. You may be able to get a low documentation (‘low doc’) loan. With a low doc loan you’ll still have to provide some information about your business, like your BAS statements for the past 12 months, but much less than you’d need for a regular loan. You’ll also need to make a declaration (‘self-certify’) that you can afford to make the repayments.
Your credit rating will play an important part too. Lenders will want to see that neither you nor your business has fallen behind with repayments on any other financing.
While the low doc option can offer a shortcut to getting your mortgage, there can be drawbacks. You may need a larger deposit, miss out on package discounts, or have to pay higher rates than with a regular loan.
And despite what some lenders or mortgage brokers will tell you, it may not be your only option if you’re self-employed. So it’s wise to check all the alternatives before you decide. At Loan Market Ellenbrook we can give you expert, impartial advice to help you find the ideal loan. Call us today and take the first step towards owning your dream home.