How to get a home loan when you’re self-employed

Taking out your first home loan can be one of the most challenging, yet exciting times of your life. However, when you’re self-employed the process can feel like you’re running a separate race to everyone else with even greater obstacles.

Reduce Home Loans may be able to assist Aussie business owners in gaining mortgage approval when they cannot satisfy “traditional” income verification requirements of a standard home loan.

Amidst growing pandemic-related restrictions in June 2021, a record number of new companies were registered (34,868), according to ASIC data released to the Sydney Morning Herald. In the first six months of 2021 alone, 152,000 companies were registered – an increase from 110,000 in the same period in 2020.

The tens of thousands of new businesses are likely due to a recent boom in entrepreneurs and sole traders looking for alternatives to traditional 9-5 work off the back of the impacts of COVID-19.

And for those tens of thousands of new business owners, many may now be considering purchasing property and wondering how their shift away from typical full-time employment may impact their ability to get a home loan.

Let’s explore how a self-employed potential homebuyer can boost their chances of home loan approval and get a foot on the property ladder.

Preparing for a home loan application

When you apply for a standard home loan, the lender will assess your personal financial situation, including your credit history and credit score, to determine whether you can comfortably service the loan.

This requires you to submit documents, such as personal identification (passport or driver’s license), proof of employment and income (tax return or PAYG pay slip) and your regular spending (bank statements).

Regardless of your employment status, you will need to meet a loan-to-value ratio (LVR) criteria (generally between 80-90% LVR) to gain loan approval. This means either saving up a home loan deposit ideally of 20% to avoid costly lender’s mortgage insurance (LMI), or reducing your existing LVR by building up equity in your home loan if you are looking to refinance.

The fact of the matter is that home loan lenders will assess your income and employment with a fine-tooth comb when you submit your mortgage application. The chances of your gaining loan approval comes down to several factors, with your risk level being one of the biggest.

In terms of ensuring your mortgage repayments are met consistently, being employed on a full-time basis offers a lower level of risk to the lender that you may default on the loan. This requirement can therefore be a challenge for self-employed first home buyers who may not be able to attach a pay slip from an employer to their application.

This is where Alt-Doc loans may come in handy for small business owners and self-employed borrowers.

All about Alt-Doc home loans

In Australia, an Alt-Doc home loan stands for ‘alternate documentation’, meaning it is suitable for applicants who do not meet the traditional application processes of a mortgage.

Self-employed Australians are one of the best examples of potential customers for an Alt-Doc home loan, as despite their cash flow, they may not satisfy the typical income verification required when applying for a standard home loan (also known as a full-doc loan).

Instead, a self-employed borrower will need to provide evidence of the financial position of the business. This may mean you will need to provide:

  • Past years of company tax returns
  • Past years of personal tax returns
  • Past business activity statements (BAS)
  • Past notice of assessment
  • Profit and loss statement for your business
  • Balance sheet for your business (covering last 12 months)
  • Proof of ABN and GST registration for at least two years

Self-employed customers must boost their borrowing power with as much evidence that they can afford to service the potential loan repayments comfortably. It is crucial that you keep accurate records of the finances of your business to support your application.

If you’re a relatively new business owner, perhaps only having started your business during the latest lockdowns, you will not have historic documentation. In this instance, it may be worth considering a low-documentation, or low-doc home loan.

What are the benefits and risks of Alt-Doc loans?

Before making any financial decision about self-employed home loans, it’s worth weighing up the pros and cons of taking out an Alt-Doc home loan.

Arguably the greatest advantage of an Alt-Doc home loan is that it affords you access to a mortgage (assuming you meet the eligibility criteria), so that you can purchase property without being employed to a business full-time.

However, as you are self-employed, the home loan lender is aware that your income can fluctuate. This is in contrast to being employed full-time where there is some assurance that you will receive a consistent income. Due to this risk of fluctuation, the lender may charge a higher interest rate than one offered with a standard home loan to account for this.

Starting a business and becoming self-employed is an endeavour that should be rewarded, not punished, by the banks. And this is where Alt-Doc home loans can offer a lifeline to Aussie self-starters looking to achieve the Great Australian Dream and run their own business at the same time.

Reduce Home Loans offers Alt-Doc home loan options to both owner-occupiers and investors, including the option of interest-free repayments.

If the banks said no, give us a call on 1300 REDUCE (733 823) and speak to an accredited Finance Manager to find out if our Alt-Doc loans can work for you.

 

Any statement/s are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.

 

(29)    For the Rate Cutter Variable where the borrower pays $1170 upfront fees then a corresponding loyalty discount of 0.10% p.a. off the Rate Cutter Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(27)    For the Investor Rate Slasher Cash Back Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Investor Rate Slasher Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(26)    For the Low Rider Cash Back Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Low Rider Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(25)    For the Economizer Cash Back Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Economizer Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(24)    For the Super Saver Cash Back Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.10% p.a. off the Super Saver Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(23)    For the Super Saver Variable where the borrower pays an upfront fee of $1170 then a corresponding loyalty discount of 0.15% p.a. off the Super Saver Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(22)    For the Economizer Variable where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.11% p.a. off the Economizer Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(21)    For the Investor Cash Back Hero Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Cash Back Hero Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(18)    For the Home Owners Dream 1 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(20)    For the Cash Back Hero Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Cash Back Hero Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(14)   For the Investor Rate Slasher where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.09% p.a. off the Investor Rate Slasher rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(12)   For the Investor Rate Lovers Interest Only where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.07% p.a. off the Investor Rate Lovers Interest Only rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(11)   For the Wealth Maximizer 3 year fixed Principal & Interest where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Wealth Maximizer reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(10)    For the Wealth Maximizer 2 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Wealth Maximizer reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(9)    For the Home Owners Dream 3 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(8)    For the Home Owners Dream 2 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(7)    For the Investor Rate Slasher where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.09% p.a. off the Investor Rate Slasher rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(6)    For the Investor Rate Buster Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Investor Rate Buster Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(5)    For the Rate Buster Variable where the borrower pays an upfront fee of $150 then a corresponding loyalty discount of 0.05% p.a. off the Rate Buster Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(4)For the Rate Slasher Variable where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.08% p.a. off the Rate Slasher Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(3) For the Investor Rate Lovers Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Investor Rate Lovers Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(2)For the Rate Lovers Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Rate Lovers Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(1) For the Low Rider Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Low Rider Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(28) For the Rate Crusher 1 Year Fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.05% p.a. off the Rate Crusher reverted variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(19) For the 1 Year Fixed Wealth Maximizer where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the 1 Year Fixed Wealth Maximizer reverted variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.