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Key takeaways:
- Lenders in Australia assess self-employed borrowers on their ability to repay the home loan based on business profits rather than employee payslips.
- The average home loan amount for self-employed borrowers was $616,000, compared to $540,000 for full-time employees.
- In most cases, lenders will charge a higher interest rate on a self-employed home loan and require a larger deposit (normally, at least 20%).
What is a self-employed home loan?
A self-employed home loan is specifically designed for borrowers who work for themselves rather than being employed by a company. This type of home loan recognises that self-employed individuals may have different financial circumstances compared to employees.
For example, when you’re self-employed, you might not have regular payslips or a steady income. Instead, you might earn income through contracts, freelancing or running your own business. This can make it trickier to prove your income and show that you can afford a mortgage.
Self-employed home loans cater to these situations by offering flexible lending criteria. They take into account your business income, rather than just looking at a standard paycheck. Lenders typically look at your tax returns and business financial statements to assess your income stability and ability to repay the loan.
Examples of self-employed individuals
There are roughly one million independent contractors and self-employed operators across Australia, according to recent ABS data.
Here are some examples of people who are self-employed:
Business owners
People who own and operate their own businesses, whether as sole proprietors, partnerships, or through a company structure.
Freelancers and contractors
Individuals who work on a contract basis or provide services independently.
Consultants and professionals
Those who provide specialised services on a freelance or consulting basis, such as doctors, lawyers, engineers, etc.
Entrepreneurs
Borrowers who have started their own businesses and may not have a regular salary but generate income through their business activities.
How are self-employed home loans different?
These loans are designed to accommodate the specific financial situations of self-employed borrowers, making it easier for them to secure financing for buying a home. The application process usually requires alternative documentation compared to standard home loans, such as tax returns, business financial statements, and evidence of ongoing contracts or income streams.
Self-employed home loan vs standard home loan
Standard home loan
- Lenders normally require two recent payslips, bank statements for the last three to six months, a letter from your employer outlining your employment status and salary, ATO notice of assessment, etc.
- More competitive interest rates on offer with standard fees and charges.
- Some lenders accept low deposits of only 3% of the property’s value.
- Most banks, credit unions and lenders offer a range of standard home loans in Australia.
Self-employed home loan
- Lenders usually require proof of self-employed income, including your tax returns and business financial statements.
- Generally attracts higher interest rates due to the perceived risk by lenders.
- May require a larger deposit of at least 20% of the property’s value.
- There may be a limited choice of lenders and loan products to choose from.
Fact: Aside from the application and assessment criteria, self-employed home loans are just like any other type of mortgage. They generally offer the same options and features.
Do self-employed home loans attract higher interest rates?
In most cases, self-employed home loans come with higher interest rates because lenders view self-employed borrowers as riskier. This is because self-employed income can fluctuate throughout the year and is considered less stable compared to borrowers who earn a fixed salary or wage (known as PAYG employees).
Lenders usually factor in this higher risk when setting interest rates. They do this to protect themselves against possible changes in income or business downturns that might make it harder for borrowers to pay back the loan.
However, as a self-employed borrower, you have options. Once you demonstrate your ability to make repayments over a period of time, it’s worth reaching out to your bank and asking for a better interest rate. Alternatively, you may consider refinancing to a new lender.
Documents you’ll need if you’re self-employed
If you’re self employed and/or are an ABN holder, you’ll need to provide the following documentation:
Two years of personal ATO Notices of Assessments
Proof that your ABN has been registered for at least two years
Business bank statements for the past three months
Business Activity Statements (BAS) for the past 12 months
Some lenders may require additional information, such as:
- Personal income tax returns
- Partnership, company or trust tax returns
- Proof of your business liabilities
What if you’ve been self-employed for under 2 years?
Some lenders may hesitate to accept applications if you’ve been self-employed for less than two years. However, it’s still possible to secure a home loan, albeit with extra documentation and considerations.
Certain lenders specialise in low-doc home loans tailored for self-employed individuals. Moreover, maintaining a good credit score and solid track record of your personal finances can improve your chances of approval, even with a shorter self-employment history.
Tip: Regardless of how long you’ve been in business, a skilled mortgage broker can talk you through your choices when applying for a home loan. Many brokers have experience working with ABN holders and business owners, and can usually provide you with loan options from non-bank or specialist lenders (some of which you may have never heard of).
How to get approved for a home loan if you’re self-employed
Getting approved for a home loan as a self-employed individual involves several key steps.
1
Have your finances in order
This includes preparing your tax returns, profit and loss statements (BAS), and business bank statements to demonstrate your income and financial stability to the lender.
2
Maintain a good credit score
Pay your bills on time and manage your existing debts responsibly. Lenders assess your credit history to determine your reliability in repaying a loan.
3
Have a larger deposit saved
Aim for around 20% of the property’s value as this can improve your chances of approval. A large deposit shows lenders that you have financial discipline and reduces their risk.
4
Be transparent
Provide the lender with as many details of your business operations, including any ongoing contracts or invoices from clients, as noted by self-employed home loan provider Pepper Money.
5
Get help from a professional
If you want to lighten your load, work with a mortgage broker experienced in handling applications from self-employed borrowers. They can help in navigating the lender’s requirements, finding the right loan for your needs, and presenting your financial situation in the best possible light to improve your chances of securing approval.
