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If you’re a regular pay-as-you-earn (PAYE) employee, you can just give your lender payslips to demonstrate your income, but it’s a bit more complicated for self-employed borrowers.
It’s certainly not a deal breaker - plenty of business owners have little problem getting home loans, but it’s worth familiarising yourself with why it can be a bit more challenging.
At the end of the day, lenders just want to be satisfied that the chances of you defaulting on your home or personal loan are low.
It can sometimes be a bit more arduous for the self-employed to prove this, but as long as you can do so, you shouldn’t have many problems. This can be contingent on providing your BAS (business activity statements), or proof of work and income.
5 Tips for getting approved for a self-employed home loan
While obtaining a home loan as a self-employed borrower may present extra challenges, it’s certainly not impossible. Here are some tips to enhance your chances of securing financing:
1. Keep your financial records organised
Maintain accurate and up-to-date financial records, including tax returns, profit and loss statements, bank statements, and business activity statements (BAS).
Be prepared to provide documentation for at least two years, as this demonstrates a consistent income history to lenders. If you don’t have two years' worth of statements, you might need to consider alternative methods, explained further below.
2. Improve your credit score
A strong credit score enhances your chances of loan approval. Pay your bills on time, reduce existing debt, stay on top of your existing business borrowings, and don’t keep applying for loans - getting rejected a lot for loans can hurt your credit score.
3. Increase your deposit
Offering a larger down payment can help mitigate the perceived risks associated with self-employment. A higher down payment not only reduces the loan amount but also demonstrates your commitment to the investment.
4. Consider alternative lenders
While many lenders offer home loans for self employed people, banks often have stricter lending criteria. Alternative lenders like credit unions or non-bank lenders might be more flexible in writing loans for self-employed borrowers who might not meet standards at more traditional lending institutions.
For example, non bank lenders aren’t guided by APRA’s serviceability buffer, so might have less stringent stress tests.
5. Look into low-doc home loans
Low document home loans don’t require require as much paperwork as standard loans, useful for self-employed people who don’t have traditional means like payslips to demonstrate income.
This could be particularly helpful for borrowers who have just begun working as a sole trader, and don’t have much of a track record. Lenders might be able to consider the borrowers prior employment history in the same industry if the loan is low document.
Lenders will still ask for details about your business and the associated income, which might include bank statements and tax returns, and an accountant’s letter confirming your ability to make the repayments.
Since low doc loans do not build as comprehensive a picture of your financial state to lenders, they are viewed as riskier, and therefore tend to attract higher interest rates. Only certain lenders offer low doc loans in Australia.
Self-employed home loan requirements in Australia
While requirements vary between lenders, preparing the right paperwork can help streamline the approval process. Most lenders will ask for:
- Proof of identity, such as a valid driver's licence or passport
- ABN and business registration details to confirm your self-employed status
- Business Activity Statements (BAS), usually covering the last 6-12 months
- Personal and business tax returns, often for the previous one or two financial years
- Business and personal bank statements to verify income and cash flow
- Details of existing debts and financial commitments
- Evidence of savings or a home loan deposit, along with any available assets
Why is it harder to get a loan if you’re self-employed?
Lenders assess loan applications based on the borrower's ability to repay the debt. They want to figure out their current income, expenses and debts, and see if their financial situation will stretch to accommodate the new loan.
This is fairly straightforward if the borrower is an employee, because they can just use their payslips to demonstrate their regular income.
For self-employed borrowers, however, being accepted for a home loan can be more complicated, for several reasons:
It’s harder for self-employed people to demonstrate income
Unlike salaried employees who can provide payslips and employment contracts, self-employed borrowers rely on documents like company tax returns, personal tax returns, profit and loss statements, and bank statements. These documents require careful preparation and interpretation, and any inconsistencies can raise concerns for lenders.
Self-employed people sometimes have inconsistent income
Self-employed borrowers often experience fluctuations in income, making it harder for lenders to assess their repayment capacity. Irregular earnings can make it difficult to demonstrate a stable financial position, leading to increased scrutiny from lenders.
Self-employed borrowers sometimes seem riskier
Lenders typically take the view that there’s a higher risk of a borrower's financial circumstances changing if they are self-employed. Many self-employed people are in trades and construction, and in any given month, construction companies tend to top the list in the personal insolvency numbers.
This increased risk perception often translates into stricter lending criteria, including higher down payment requirements, higher interest rates, or more extensive documentation requests.
First published in July 2023
