This is the most comprehensive guide to getting a self-employed home loan in Australia.
The best part?
I’m going to show you the exact techniques and information you need to know before applying for a self-employed home loan in Australia.
PLUS we’re going to look at which banks are the best for anyone that is self-employed in 2019.
So if you work for yourself, or get paid through your tax return you are going to love this guide.
- How to get a home loan when self employed?
- Self Employed Home Loan Common Issues
- What does a lender look for in self-employed applicants?
- The rise of the 2019 Entrepreneur
- Application for self-employed home loan
- How can I get my tax returns looking perfect?
- Which banks are the best in 2019?
- Where do business loans sit?
- What about a low doc loan – am I eligible?
- Next steps and settling your new home
How to get a home loan when self employed?
Working for yourself has lots of perks (you are your own boss) but banks will sometimes make it harder to get a home loan…
Often those who are self-employed are asked much more questions and need to produce much more information than people who are permanent full time employed.
Because most lenders are looking for a stable income which can be hard for some people.
The difference is that as a self-employed borrower you will need to show two years worth of tax returns – but then from there it is the same for everyone.
(Plus you need to have been trading in your own business for at least 18 months)
Self Employed Home Loan Common Issues
Generally speaking, lenders are often cautious when it comes to dealing with those who work for themselves.
In the past, lenders have found that self-employed people don’t always have as much financial stability (which in our experience is not true at all).
A few other common issues we have seen:
- ⛔️ You need to have been in business for at least 18 months, or you need to have been in the same industry for at least 2 years (which is common for Contractors who might have received a salary in the past and are now self-employed).
- ⛔️ The business is trading, but you have a clever accountant who has reduced your tax bill – but as a result, your tax returns might not show enough profit to service your loan. If this is the case you can look at Low Doc loan options, or review your tax returns with your accountant.
- ⛔️ You have rapidly expanded the business and profit has increased over 20% year on year, and the banks are asking lots of questions. There are banks that will only require the most recent year’s tax return, they understand businesses can grow rapidly.
- ⛔️ The lender is using the lower figure from your past 2 years of tax returns. A large number of banks will adopt the lowest profit figures from your past 2 years of income. The good news is we have lenders that will use your most recent figure, or possibly the higher one, or lowest at 120% of profit depending on the situation.
The fact is, if you’re self-employed and #killingit then you’ve got nothing to fear because where there’s a will, there’s a way, and we will find it for you.
What does a lender look for in self-employed applicants?
Lenders are looking for financial stability, and the ability to prove this.
- ✅ Last 12 to 24 months Tax returns
- ✅ Sometimes will want a letter from your accountant to confirm your business is trading profitably
- ✅ At least 18 months to two years of proof of solid income
It’s about showing the lender that you’re not at risk, so the more proof you have, the better the outcome will be.
The rise of the 2019 Entrepreneur
I think it’s no secret that there’s a growing number of people choosing to work for themselves, whether it’s running a small business, freelancing or being a consultant, no matter what field, it’s more prominent than ever.
Usually, this is structured as a sole trader and is completely fine to get your loan approved…
So here are some ways that we can help the lenders rest easy, and you can be confident in your application as a self-employed individual.
Application for self-employed home loan
When you are applying for a home loan when self employed what do the banks look for?
- ✅ You have more than two years of self-employed experience – Lenders want to see that you’ve got a bit of history working in your field. If you have less experience than this, then they are looking for you to demonstrate how you have remained in that field. So if you’re a freelance makeup artist, the lender will want to see that you worked as a makeup artist for a company earlier in your career. Keep old payslips and get references to help prove this.
- ⛔️ You have less than one year experience – This will make it harder for you and more often than not, banks won’t want to loan to you if you’ve worked for yourself less than one year. They want to see proof of income. Yet depending on the lender you may be able to use the wage from your previous employment to help build your case.
- ✅ Tax returns are important – Lenders will look closely at your tax returns to figure out how much you earn. So make sure you have these handy. They are going to be doing some forecasting to figure out if the business is growing and if your income is stable. Depending on the lender, changes what they look for. Some will go off your lowest income in a certain period and others will use your most recent tax return.
- ⛔️ Lenders track industry data – It feels like they have eyes everywhere, am I right? So lenders also track industry data. This means that they look at other applicants in your industry and see how they’re going. If there are a lot of people in your industry that are defaulting and this has risen over the past few years, this can work against you.
How can I get my tax returns looking perfect?
Now that we’ve determined that your tax returns could very well be the lifeblood of your application, it’s important to know what lenders look for in tax returns.
Each tax return you send across needs to come with a notice of assessment where the lender checks the signatures and certification to make sure everything matches. The lender will look at the return in detail and they may even ask for further documentation depending on if you’re a company or a sole trader.
Next, they review any odd expenses that they don’t see are part of your regular business.
In some cases they may add this on to your income to determine a more realistic figure, others won’t. This is called an add-back. These expenditures can reduce your taxable income so the lender recognises this as something other than an ongoing expense.
What’s an example of an add-back?
- ✅ Interest paid on a business or personal loan
- ✅ Extra contributions made to your superannuation fund
- ✅ Depreciation on taxable assets
- ✅ Net profits you retain in a company
- ✅ Any income distributed to others through a trust
- ✅ One-off expenses that don’t show up on other tax returns
- ✅ Company cars also can sometimes play a part in this
Which banks are the best for self employed loans?
Banks policies on home loans for self employed people change all the time.
We have included a snapshot as at March 2019 to give you an idea on what the major bank’s criteria are for self-employed loans.
What the table below tells you is what the bank’s income criteria is, ranging from only requiring:
- 📄 Current Years Income: The bank will use your current financial year’s income. So, for example, you had an average income year in FY17, and then in FY18 had a much better year the bank will use the higher figure and (potentially) look at lending you a higher figure. So for example, if in FY17 you made $20,000 and then in FY18 you made $100,000 the bank would adopt $100,000 and increase your borrowing capacity significantly.
- 📄 Lower of Past 2 Years Income: The bank will use the lowest of your past 2 years income or profit figures. So for example, if you had a great year in FY18 making a profit of $50,000 and then a bad year in FY19 making a profit of $40,000 the bank will use the lower figure of $40,000 which will reduce your borrowing power.
- 📄 Average of Past 2 Years Income: The lender will use the average of your past 2 years income. So for example, if you earned $50,000 in the 2019 financial year, and earned $70,000 in the previous financial year the bank will adopt the average of the two or $60,000 as your income figure. This can also reduce your borrowing power, some banks will even just adopt 120% of the lower figure which still works out to be $60,000 in this case.
Current Years Income
✅ Yes, if less than 80% LVR
✅ Yes, if less than 80% LVR
Lower of the past 2 years Income
✅ Yes, up to 90% LVR
Average of the past 2 years Income
✅ Yes, up to 95% LVR
✅ Yes, up to 90% LVR
✅ Yes, up to 95% LVR
There are banks that have even more flexible criteria for self employed people, speak to our Expert Mortgage brokers about your situation. Call us on 1300 088 065 or complete our online form for a callback.
Where do business loans sit?
Depending on how your business is set up, some lenders will send you to the business department, however, beware of setting up a loan as a business. It won’t benefit you if you’re using your residential property as security on the home loan.
This will only result in more fees and a higher interest rate. So look for a lender that offers standard residential rates.
Speak to our team of experts about this situation for an in-depth consultation, otherwise, figure out the right questions to ask your mortgage broker here.
What about a low doc loan – am I eligible?
You could be.
Again it really comes down to the lender and if they will allow you to submit an income declaration instead of your tax return. This will then be used to decide if they will loan to you.
The problem is that low doc loans come with other strings attached for example your borrowing capacity will be lowered and you’ll be charged Lenders Mortgage Insurance (LMI). So it really comes down to your priorities and what’s more important to you.
In actual fact, a lot of banks are starting to get rid of the low doc loan option. This is so that they can simplify their offerings but really it may make it more difficult for small to medium-sized businesses to obtain a home loan when their income doesn’t meet the lending criteria.
These days, you still need to provide some documentation with low doc loans including:
- ✅ Business Activity Statement (BAS) for the last 12 months showing your annual revenue
- ✅ A letter from your accountant confirming your total income
- ✅ Business banking statements showing your income
- ✅ Older tax returns from 2+ years ago
- ✅ Management accounts, or profit & loss statements
Next steps and settling your new home
Our team here at Hunter Galloway is here to help you buy a home in Brisbane. Nathan & Joshua Vecchio are Senior Mortgage brokers who specialise in making your home journey easy.
The Hunter Galloway Mortgage Broker Brisbane team is here to help. We have a team of home loan experts.
Unlike other mortgage brokers who are just one person operators, we have an entire team of experts to help make your home loan journey as simple as possible.
If you want to get started, please get in touch here and we can book a time that suits you – either a phone call information session or a face to face meeting (which doesn’t cost anything for you).
Further reading for Home Buyers…
- 🏡 For our comprehensive guide for First Home Buyers, check out this page here.
- 🏡 Looking at getting a loan, check out our Complete First Home Buyers guide.
- 🏡 Home Loan Guide to Brisbane
- 🏡 And don’t forget the costs of buying which we covered in detail here.
Note: Information is current as at March 2019 and subject to change without any further notification. Any home loan application is subject to credit approval, and verification of all supporting documentation. Consider this article as general in its nature and not to be taken as advice.