Self Employed Home Loans Sydney

Getting A Loan When You’re Self Employed

Australia has a thriving entrepreneurial culture, with many individuals choosing the path of self-employment. Although this lifestyle offers numerous benefits like flexibility and independence, it may present some hurdles, especially when it comes to securing loans.

For instance, getting home loans for self employed individuals differs from someone employed on a Pay As You Go (PAYG) basis. While the validation process for personal information remains the same, such as age, credit history, and living expenses, the verification of income differs.

Those with PAYG employment typically provide two recent pay slips as proof of income. However, home loan self employed Sydney applicants must provide their business financial records to confirm their income.

Fortunately, with the right preparation, you can increase your chances of successfully getting a loan.

Self-employment implications

In Australia, you’re considered self-employed if you run your business or trade as a sole trader, in a partnership, or through a trust or a company. You’re essentially not working for an employer who pays you a regular wage or salary. This category also includes freelancers, independent contractors, and gig economy workers.

A PAYG employee is considered low risk because lenders can scrutinise their bank statements to cross-check the salary credits, ensuring the figures on the pay slips match the actual deposits in their accounts. However, income validation isn’t as straightforward for self-employed individuals because the lender needs to go beyond your personal finances and consider your business’s capacity to pay. This is why lenders usually require evidence of at least two years of trading or business history.

Suppose you are a self-employed contractor for 1 year getting a home loan. In that case, banks and lenders may view you as a riskier borrower than someone who has successfully managed their business and maintained a stable income over multiple years.

Generally, the higher the perceived risk, the more cautious lenders may be in approving your loan application. They may require additional conditions, such as a larger deposit or even hesitate to grant the loan. It’s worth noting that some lenders do offer specialised loans designed specifically for when self employed individuals decide to apply.

However, there is an option for those who have recently gone into business for themselves but have a long industry history. In such a scenario, you could consider applying for a low documentation loan, where your longstanding industry experience may be considered, despite your somewhat sparse business records.

Risk implications for contractors, consultants, single entities, and company directors

While it’s expected that PAYG employees are considered low-risk, company directors getting classified as high-risk is a different story. Here’s how different self-employed individuals rate in terms of risk:

• Contractors

Contractors having long-term contracts are often seen as low-risk, while those with short-term contracts in the same industry and line of work are usually perceived as medium-risk.

Contractors are expected to provide a copy of their contract and bank statements demonstrating that payments have indeed been received. If the contract is nearing its end with less than six months remaining, proof of a contract renewal might also be required.

To qualify as a contractor, you must not be a director of the company you’re working for. If you hold a director position, please refer to the section on Directors, or if you are contracting under an ABN, see the section pertaining to sole traders.

• Consultant

Consultants’ classifications can vary based on their work setup. A consultant who is employed by a company and earns pay slips from that entity will be treated as a PAYG employee. On the other hand, a consultant who offers their services under their own company or ABN and holds a position as a director or operates as a sole trader, will be considered self-employed.

• Sole trader

Sole traders considered self-employed are typically classified as medium-risk candidates by lenders. To show proof of income, sole traders must provide their tax returns, a notice of assessment, and a letter from their accountant.

• Company director

Company directors are categorised as high-risk by some lenders. If you are a director of a company from which you draw income, lenders consider you self-employed.

Even if you generate payslips through your company, a lender will need comprehensive financial information about the company. For instance, the lender generally requires the last two financial years or draft returns. Your income capacity will then be evaluated based on the financial state of your business, with the income you draw from the business being of lesser importance.

Lenders will also conduct thorough background checks on the company to confirm directorship status and history, any debts with the ATO (Australian Taxation Office), and whether the company is registered for GST (Goods and Services Tax), often a proxy for anticipated revenue.

However, it’s important to remember that due to responsible lending practices, not all lenders offer low doc loans. If your business has been operational for less than a year—despite your extensive experience working for another employer—the approval of your loan application remains at the discretion of the lender.

Loans available to a self-employed person

Here is a brief overview of the different types of loans available to qualified individuals:

• Home loan: This loan is typically used to purchase a residential property for the borrower to live in. It’s often secured against the property itself, and the term usually spans 15 to 30 years.
• Investment property loan: Like a home loan, an investment property loan is used to purchase residential property. The key difference is that the purchased property is intended for investment purposes—for example, to rent out to tenants—rather than for the borrower to occupy.
• Commercial property loan: This type of loan is used to purchase property for commercial use, such as office buildings, retail space, warehouses, or other business premises. These loans may have different terms and conditions compared to residential loans.
• Short-term loan: Short-term loans are typically used to meet immediate financial needs and are generally repaid within a year. These could be personal loans or business loans meant for covering cash flow gaps, unexpected expenses, or funding small-scale projects.
• Asset and equipment finance: This type of business loan helps companies purchase necessary assets or equipment for operation. The loan is usually secured by the asset or equipment, reducing the lender’s risk.
• Debtor finance: Also known as invoice financing, this loan allows businesses to borrow money against their outstanding invoices. This can help businesses maintain steady cash flow, especially if their clients have long payment terms.

Each of these loans serves different purposes and will have varying interest rates, loan terms, and qualification criteria. If you’re unsure about which type of loan best suits your needs, it would be beneficial to speak with a financial advisor or broker.

Loan options: bank or mortgage broker

As a self-employed individual, you can either go directly to a bank or use a mortgage broker to secure a home loan. Both options have their own benefits and potential downsides.

• Direct to bank: Going directly to a bank allows you to engage and negotiate with the lender firsthand. You can ask specific questions, get immediate responses, and potentially leverage any pre-existing relationships with the bank. However, banks can only offer their own products, and the terms may not be as flexible, especially for home loan self-employed applicants.
• Mortgage broker: Mortgage brokers have access to a variety of lenders, including banks and non-traditional lenders, and a wide range of loan products. They can assist in finding a lender who is more understanding of self employed home loan applicants and offers competitive loan terms.

Brokers also help with paperwork and liaise with lenders, which can simplify the application process. They are paid a commission by the lender, which should be disclosed to you. It’s essential to ensure that the broker is working in your best interest and not just steering you towards the lender who pays the highest commission.

For self-employed individuals, using a mortgage broker might be beneficial due to their broader range of options and expertise in dealing with more complex financial situations. Regardless of the route you choose, it’s important to do your research, understand the terms of the loan, and ensure it fits your financial situation and goals.

Required documentation

For instance, if you are planning to apply for a home loan as self employed, you’ll need to provide several important documents to potential lenders. These typically include:

• Net Income: This refers to your business income minus expenses, as shown on your tax returns. For partners, this will typically be your share of the net partnership income plus any salary or wages. For a trust, the income of the trust that is distributed to you will be considered.
• Credit history: Your personal credit history will significantly determine how much you can borrow. Lenders use your credit score and history to assess the risk of lending to you.
• Existing debts and liabilities: Your existing debts will be subtracted from your income to evaluate your serviceability, i.e., how much you can afford to repay.
• Value of the property: For home loans, the value of the property you are purchasing will directly impact the loan amount. Most lenders offer a Loan-to-Value Ratio (LVR) of up to 80% of the property value. Some lenders might offer up to 95%, but this often comes with the necessity of paying Lenders Mortgage Insurance (LMI).
• Deposit size: A larger deposit can help increase the amount you can borrow, as it reduces the LVR and the risk to the lender.

Generally, most lenders use a formula or a borrowing power calculator to determine how much they are willing to lend. The specific lending criteria may vary significantly between lenders, and some might be more willing to lend to self-employed individuals than others.

It’s crucial to consult with a mortgage broker or financial advisor to understand your borrowing capacity better. They can guide you through different lenders’ policies and help you maximise your borrowing power.

Conclusion

Securing a loan as a self-employed individual can be challenging, but the odds can be increased with careful preparation and sound financial practices. Utilising the services of a mortgage broker and presenting solid financial credentials can make a significant difference. Remember, maintaining a healthy credit score is crucial in facilitating loan approval.