How to get a Home Loan on Contractor Income [updated 2018]

I’m going to show you exactly how to get a home loan on contractor income in 2018.

(Step-by-step).

The best part?

You’re going to see LOTS of real-life examples of these steps in action.

Let’s dive right in…

contracting income home loans

Why is it a struggle for people earning contract income to get a home loan?

Why do contractors struggle to get a home loan? 

The banks view contractor income as highly unstable and (wrongly) assume there is a high chance your contract can get cancelled at any time.

While this is often NOT the case, many banks view contractor income in much the same way as casual employment…

Short term, and unstable.

By applying with the right bank, and working with a specialist Mortgage Broker like Hunter Galloway you’ll have a much higher chance of getting your loan approved.

We work with several banks that understand contractor income and can find you competitive interest rates in the current market.

But with that being said, how do you get a home loan on contractor income?

Let’s kick things off with our first strategy…

IT-Contractor home loans

IT Contractors can apply for home loans provided their income meets certain criteria.

Step #1: Determine the type of contractor income you receive

Contractors get paid in all sorts of different ways.

Understanding your income type will determine what your home loan options are.

Specifically, you want to know if a bank will treat you as a regular (PAYG) employee, or a self-employed contractor.

And I’ll show you exactly how to do that right now.

PAYG Contractor
Self Employed Contractor
Contract Term
✅ Fixed Term, Short term, or Longer Term Contractor
✅ Fixed Term, Short term, or Longer Term Contractor
One Main Employer?
✅ One main employer
⛔️ Multiple employers
Benefits received?
✅ Receive Regular Holiday, sick leave benefits
⛔️ Do not receive Regular Holiday, sick leave benefits
Payslips?
✅ Receive regular payslip every month/fortnight
⛔️ Do not receive payslip as they charge via invoice.
Invoice?
⛔️ Do not invoice the employer as paid via payslip.
✅ Invoice employer every month, OR receives a day rate which is paid monthly.
Tax status
✅ Tax withheld and super paid by the employer
✅ Sole Trader, or company with registered ABN who invoice employer
Industry Experience
✅ Experience in industry > 2 years
✅ Experience in industry > 2 years
Time in Role
✅ Time in role > 3 Months
✅ Time in role > 12 Months
Example
👩‍💼Mining Engineer
👩‍💻 IT Contractor
💻 IT Consultant
👩‍💼Real Estate Agent
👩‍💼Management Consultant
📝 Freelancer
👨‍💻Journalist
🏗 Mining Consultant
While these are the broad categories, there are lots of subcategories of a contractor that we see including:
  • Mining Contractor 🚧 – There can be special cases and exceptions for Mining Contractors as they receive some of the highest salaries in Australia. While Mining Contractors may have shorter-term contracts today, then previously we have a few banks who adopt a common sense approach to considering applications and understand contracts can be easily replaced if a contract is not renewed.
  • IT Contractor, or IT Consultant 👩‍💻 – This is one of the more common types of contractors that we help with arranging home loans. IT Contractors are some of the best-paid workers across Australia, and so many banks do not understand their type of work and decline their applications. Due to the high employer demand and relatively low risk, we have several banks we work with that can assist IT Contractors with getting a home loan.
  • Construction Contractor 🏗 – Contractors that work in construction might work from project to project, like a unit development ora large mining project. If you supply your own material and tools to the construction project then some banks will consider you being self-employed so you will need to provide 2 years tax returns – but the benefit is that you can be assessed like other contractors.
  • Journalist or Freelancer 📝 – Contractors who work as journalists or freelancers are paid on a per work basis, like on an individual article. Being a freelancer your income can be assessed on a few different methods, but typically you will need to provide the last 2 years tax returns to substantiate income.
  • Subcontractor 👩‍💼 – Subcontractors can be employed on both a regular PAYG or self-employed contractor basis. Subcontractors are very common in the construction, mining and real estate industry with many working a job that has been externally commissioned. The income treatment of your role really comes down to how you are paid – do you receive payslips (if so you are PAYG) or do you invoice your employer (if so you are considered self-employed).
How to get a Home Loan on Contractor Income infographic

How to get a Home Loan on Contractor Income infographic

As you can see, each type of contract worker is treated differently by the banks.

The income is generally going to be acceptable, it really comes down to what information needs to be provided to get your home loan approved.

home loans for IT contractors

IT Contractors are some of the best-paid workers across Australia, and so many banks do not understand their type of work and decline their applications. Due to the high employer demand and relatively low risk, we have several banks we work with that can assist IT Contractors with getting a home loan.

Step #2: Collect your documents

Once you are ready to look at home loan options, it’s time to collect your supporting documents.

You’ll need to provide evidence to support your current income and future employment through a few methods including:

PAYG Contractor Self Employed Contractor
☑️ 2 x most recent payslips

☑️ Group certificate (PAYG Summary)

☑️ Last 3 months bank statements

☑️ Employment Contract

☑️ Letter from employer

☑️ 2 x most recent years tax return

☑️ Tax portals, Quarterly BAS

☑️ Last 3 months invoices

☑️ Last 3 months bank statements

☑️ Employment Contract to the main employer

Does length of contract matter?

When there are less than 5-6 months left on your current employment contract the lenders will place much more importance on your previous work history to understand employment patterns.

If you have been contracting for over 2 years, and have always been employed in short-term contracts then this is fine.

We may just need to provide a copy of your last 2 tax returns to show your income levels have stayed consistent throughout this time.

If you have been contracting for less than 2 years, have only recently changed to a contract and your contract is about to expire it could be worth talking to your employer to see if they can extend the term of the contract.

family homes morningside

Case study: Contractor with less than 6 months on his contract term

Case Study: Contractor with less than 6 months on his contract term

  • Kate & Thomas are wanting to apply for a loan. Thomas has been working for the same employer for the past 3 years, and 4 months ago he switched to be a contractor as it offered a higher rate of pay.
  • Thomas’ contract only has 2 months left to run, as it was initially a 6-month contract. He is also considered a self-employed contractor because he invoices his employer each month.
  • We were able to arrange an 80% LVR loan through a major bank providing them with the following:
    • Last 2 years tax returns (showing he had been working in the same job/industry for over 2 years)
    • Most recent quarter’s BAS, showing income level
    • Last 4 months bank statements
    • Last 4 months invoices
    • Current employment contract and a letter from employer confirming their intention were to renew the contract at the end of the term.
  • In this case, we used Tom’s new contract income rate (which was 35% higher than previous years) and helped him borrower to a higher amount than if he was relying on his old income.

Feel free to complete our free online assessment form to chat with a mortgage broker who can help you get approved.

chat-to-mortgage-expert

Step #3: Calculate how much you earn

Most banks (and many inexperienced brokers) calculate contractor income the completely WRONG way.

Instead of calculating your current income they’ll rely on figures from 1, or 2 years ago.

…And how does this end?

HORRIBLY!!!

That’s why you want to make sure you are working with an experienced mortgage broker who understands how to calculate your income…

The right way.

Here’s the best way to calculate your contractor income:

PAYG Contractor Self Employed Contractor
Documents required
  • ☑️ 2 x most recent payslips
  • ☑️ Group certificate (PAYG Summary)
  • ☑️ 2 x most recent years tax return
  • ☑️ Tax portals, Quarterly BAS
How to calculate?
  • ✅ Lesser of the most recent month’s gross income on payslip (excluding super) x 12 = Annual Figure.
  • ✅ If this amount is higher than PAYG Group certificate, need an explanation or letter from employer confirming why.
  • ✅ Most recent years taxable income
  • ✅ If your current contract income is higher than previous years taxable income: Utilising BAS, P&L Management accounts and possibly an accountants letter we can utilise the current year’s income.

Mining-contractor-home-loans

Case study: Using your current self-employed contractor income

  • Samuel has been contracting at $1030/day + GST since January 2017, his FY16 taxable income was $100,000 and FY17 taxable income was $90,000 and has a few existing home loans.
    • His current tax years income is projected to be $150,000.
    • Samuel spoke to his bank who said they would only use $90,000 income towards his servicing.
    • At Hunter Galloway, we were able to use the FY18 financial year, even though he hadn’t completed his tax returns by utilising P&L draft accounts prepared by his accountant, the last 4 quarters BAS verifying his income and 6 months bank statements showing his contract income had increased.
    • The result is that we were able to use $150,000 income towards his servicing, rather than $90,000 that his bank advised.

Feel free to complete our free online assessment form to chat with a mortgage broker who can help you get approved.

information-session

Step #4: Work out what you need in a home loan

This is important:

What you need in a home loan is much more than a cheap interest rate.

Having the right features can help you repay your home loan MUCH faster.

How?

Being a contractor your income can be fairly lumpy.

And if you were to fix your interest rate, you would be limited in making extra repayments.

fixed vs variable home loans for contract income

Fixed and variable rates both have their advantages and disadvantages. Variable home loans do not have certainty, and fixed home loans do not let you make additional repayments over $10,000 per year.

You need to weigh up the good with the bad when it comes to choosing the type of home loan.

Other features to consider include the ability to make extra repayments, redraw facilities, repayment holidays, interest only repayments and mortgage offset accounts.

home loan features

Some other home loan features to look for include the ability to make extra repayments, redraw facilities and home loan offset accounts.

Read More: 10 [simple] Tips for Choosing the Best Home Loan

best-home-loan-brisbane

These 11 steps will help you find the best home loan in Brisbane!

Step #5: See how much you can borrow as a contractor

Here’s the deal:

Once you have determined what income you can use your borrowing capacity is simple to calculate

In this basic example, if your income is $150,000 and you are single without any credit cards your mortgage broker can arrange a loan of around $942,000 – however if you are a couple and your combined income is $150,000 you will only be able to borrow around $814,000 because you both need to share your cost of living between you.

Combined Income before tax & excluding super Borrowing Capacity Single, No credit Cards Borrowing Capacity Couple, No Credit Cards
 $                    50,000.00  $                320,000.00  $              173,000.00
 $                    70,000.00  $                440,000.00  $              313,000.00
 $                    90,000.00  $                557,000.00  $              430,000.00
 $                  100,000.00  $                625,000.00  $              497,000.00
 $                  150,000.00  $                942,000.00  $              814,000.00
 $                  200,000.00  $             1,262,000.00  $           1,134,000.00
 $                  300,000.00  $             1,853,000.00  $           1,725,000.00

There are lots of factors that affect borrowing capacity, like credit card limits and living expenses.

In some cases, it would be more accurate to ask your cat what your borrowing capacity is than using online calculators… Find out how to work out your borrowing capacity by talking to Hunter Galloway.

Read More: First Home Buyers Guide to Borrowing Capacity.

Step #6: Talk with a Mortgage Broker that specialises in Contractor Income

The biggest secret to getting a home loan on contractor income is to use the right bank!

Contractor income earners have a much higher chance of being approved if it is submitted to the right bank.

best home loan brisbane

We specialise in helping Contractors with Finding the Perfect home Loan and focus on delivering the best service in Brisbane.

At Hunter Galloway, we are experts and would love to help you buy a home if we are relying on projected income or other contract income types. We can help IT Contractors, Mining Contractors, Construction Contractors, Subcontractors and Journalists with getting a home loan now.

Please call us on 1300 088 065 or complete our free online assessment form to get in touch with a Contract Income Expert.