A Guide to Self-Employed Mortgages
How easy is it to get a mortgage when you’re self-employed? Find everything you need to know in our self-employed mortgages guide
Introduction to Self-Employed Mortgages
Getting a mortgage when you’re self-employed can sometimes prove more difficult than for people who are PAYG employees as some lenders can be wary of the fluctuating income self-employment might cause.
This guide explains what you might expect if you’re looking for a home loan when you’re self-employed.
Read from top to bottom for all the info, or click a link to jump ahead:
- Can I get a mortgage when I’m self-employed?
- How to get a mortgage when you’re self-employed
- What are the rules?
- How much can I borrow?
- Can I claim mortgage interest?
- What do I need to get a home loan?
- Which are the best mortgages for self-employed?
- Mortgage advice tips
- Speak to an expert
Can I get a mortgage when I’m self-employed?
If you’ve been self-employed for two years or more, and have tax returns and financial accounts to prove your income, there’s likely to be a choice of lenders you could apply to for a self-employed home loan.
It may still be possible to get a home loan if you’ve only been self-employed for a brief time. Some lenders might assess income from your last job and use that to verify your income. The idea behind this is that if your business closes you could return to work and earn a similar salary for another company.
Depending on your other circumstances, borrowing with only a year of tax returns would usually require a deposit of between 10% and 20%.
How to get a mortgage when you’re self-employed
The key thing lenders will want to see if you apply for a home loan when you’re self-employed is evidence of a stable income and employment continuity. The typical way lenders will want you to prove your income stream is through your tax returns and complete business financial accounts.
If you have all your accounts in order and have been self-employed for more than two years, you may be able to find a mortgage lender willing to lend to you on similar terms they might offer home buyers who are employed and earning a regular salary.
What if I don’t have enough accounts?
If you have been self-employed for fewer than two years, and don’t have the paperwork to support your mortgage application, you may find it more challenging to secure lending at the level you desire. You’ll also find you probably need a higher deposit and two or more years of self-employed accounts. On this basis, 80% of home loans would usually be the maximum lending you could secure.
If you don’t have the relevant up-to-date tax returns, another option you could consider is a low-documentation home loan, or low-doc loan. To get a home loan on this basis you’ll need to be prepared to evidence your income through alternative documents and prove your income through bank statements, business activity statements (BAS) or a letter from your accountant.
While all this sounds incredibly straightforward, the difficulty is that not all mortgage lenders offer low-doc loans and, those that do, tend to apply far higher interest rates than you would get if you applied for a regular loan.
The mortgage brokers we work with have access to mortgage lenders across Australia and know the lenders who are most likely to approve your self-employed home loan application.
Save yourself a heap of time and hassle and have a chat with a broker experienced in helping self-employed workers secure a mortgage. It’s free and there’s no obligation to follow through.
What are the rules?
If you’re self-employed and want to get a home loan, the rules tend to be as follows:
- Most lenders require at least two years’ tax returns and financial statements
- Some lenders will accept one year of tax returns or an alternative way of verifying your income
- If you’ve recently started your own business but it is of the same kind of industry you were previously employed in, some lenders may consider your mortgage application without tax returns
How much can I borrow?
If you’re self-employed, how much you can borrow when applying for a home loan will depend on how many years of tax returns you have. While most lenders will want to see at least two years’ tax returns and financial accounts, there are some lenders who may, in the right circumstances, be able to accept just one year’s tax return.
As a general rule, a mortgage broker should be able to find a lender who may offer:
- Up to 95% of the property value with one to two years’ of tax returns
- Between 85 – 90% as a low doc loan with very little or no income verification
- 80% of the property value, if you’ve been self-employed for under a year
Can I claim mortgage interest?
If you’re self-employed and primarily work from home you may be able to claim mortgage interest payments, along with a range of additional tax deductions.
Things you can deduct from your taxes include:
- Mortgage payments
- Home insurance
- Depreciation of office equipment
- Office maintenance
- Phone and Internet
- Utility expenses including gas and electricity
If you have a dedicated office at your home, but don’t only work from home, you can still deduct some of these things mentioned above, but mortgage payments and home insurance will not be deductible.
If you’re a property investor and use a loan to purchase a rental property, you can claim the interest, or a portion of it, as a deduction. The property has to be rented, or available to rent, in the tax year for which you intend to claim a deduction. If you use the property privately, you can’t claim the interest
What do I need to get a home loan?
If you’re self-employed, you will need the following to be able to meet most lenders basic lending rules:
- Two years personal tax returns
- Two years personal tax assessment notices
- Two years company tax returns
- Two years financial statements (if available)
- Your Australian Business Number (ABN), if you’re applying for a low-doc or no-doc loan
As well as the above you will need to comply with the rules for any home loan applicant, as follows:
- A good credit history:
Although you may get a high interest rate loan if you have a deposit of 20% or more of the value of the property if you have a poor credit history. Whatever your credit history, try and get a copy of your credit file, pay off any outstanding debts and avoid applying for credit cards or other loans in the 12 months before applying for your home loan.
This is where size matters! The more deposit you have, the lower the risk you present to a lender. Lenders are more likely to make an exception to their ordinary lending rules if you have a larger deposit and require 80% or less for the remaining value of the property. Should you apply with less than an 80% deposit, a lender will charge a one-off fee for Lenders Mortgage Insurance and will be far more strict when it comes to assessing your loan application.
Many lenders want to see that you have genuine savings. Lenders view borrowers with more than 5% of the property purchase price in a savings account or investments as more likely to pay back what they borrow than those with no savings. While there are some exceptions to this policy, it’s good practice to save any spare funds in a separate savings account and contribute to it regularly.
- Property type:
Conservative by nature, most lenders prefer to lend to borrowers who want to buy ‘normal’ property; so if you want to buy a house or unit over 50m2 (internal size) you’re more likely to get approved than if you want to purchase something more unusual.
- Asset position:
You can make lenders more comfortable if your asset position matches your age and income. For example, a 45 year old first home buyer earning $120,000 p.a. with no assets, is likely to have their loan application declined. You can help present yourself as matching expectations by paying off any credit cards or personal loans and saving as much as possible.
- Payment history:
Lenders will want to see that you have a reliable history of paying credit cards, loans and rent on time. After all, if you struggle to do the basics, how will you cope with meeting mortgage repayments? You can support your home loan application with a letter from your rental agent or statements from previous loans detailing your payments.
Which are the best mortgages for self-employed?
The best mortgage for you if you’re self-employed will depend on your specific circumstances. To make sure you’re getting the right home loan with the best interest rates and term, talk to an expert mortgage broker who can assess your situation and find the best mortgage for you, from all the different kinds of home loans and rates on offer.
Make an enquiry for a free, no-obligation chat and we’ll match you with one of the home loan experts we work with
Mortgage advice tips
Six simple tips for getting a home loan when you’re self-employed:
- Stay on top of your tax returns
- Try cutting back on regular expenditure in the months prior to applying for a loan; lenders will scrutinise your spending patterns and make a judgement on your living expenses based on three months spending. If you can do anything to curb your spending in the months leading up to an application it could pay off
- Discipline yourself by sticking to a budget to streamline any potential ‘lumpy’ cash flow – this way you should safeguard your finances in the months where your income is lower
- Keep your business affairs simple. If a lender is assessing your home loan application, it will help if they haven’t got to figure out how you earn your income – keep your structure as simple as possible
- Keep on top of your financial records and business expenses
- Finally, lenders love nothing more than seeing strong evidence of income and having a good idea of a borrower’s living costs, no matter what your employment status. Anything you can do to help a lender understand your income and how you manage your money will stand you in good stead when it comes to applying for your home loan
Below we cover some of the frequently asked questions we haven’t covered above…
What if I’m a first-time buyer?
If you’re a first-time buyer and self-employed all the above rules will apply. You may find that you need a higher deposit, but there is no reason you shouldn’t be able to find a lender willing to give you a home loan, so long as you can meet their affordability requirements and prove your income through your business records and tax returns.
For a choice of lenders and to find the best home loan for your circumstances, get in touch and talk to one of the mortgage brokers we work with.
Can I get a self-employed home loan if I have bad credit?
If you have bad credit and are seeking a home loan when you are self-employed, you may face more challenges than borrowers without credit issues on their file, but this doesn’t mean a mortgage is out of reach.
Your best bet is to work with an expert mortgage broker experienced in helping borrowers with bad credit. The brokers we work with understand what lenders need to make them feel more comfortable lending to customers in these circumstances and can save you time, hassle and headaches by selecting those lenders most likely to agree your home loan.
Can I get a mortgage if I’m over 50 or 60 and self-employed?
As far as lenders are concerned, the older you are the closer you are to retiring. Naturally this can cause lenders some concern over your long-term ability to repay the home loan.
Therefore, if you’re applying for a home loan and you’re over 50, most lenders will ask to see more information about your current and future financial circumstances than they might need from a younger applicant.
As well as the usual list of detailed financial information, to satisfy responsible lending obligations and minimise their risk, you will be asked to prove a viable exit strategy, which is how you plan to repay your loan when you retire.
Selling the property isn’t regarded as an acceptable exit plan so you may have to be willing to use your superannuation payout or the sale of a different investment property to repay the outstanding debt.
You may also find that some lenders will shorten the loan term they are willing to offer you to make sure the loan is repaid in full ahead of the standard retirement age of 65.
What is a self-employed low-doc mortgage?
A low-doc mortgage is when you apply for a home loan with alternative documentation to support your application. If you’re self-employed you may struggle to be able to show adequate financial records to satisfy a mortgage lender. A low-doc loan is an ideal way to get around these issues.
If you’re interested in what loan you might be able to borrow on a low-doc basis and how much it could cost you, get in touch and speak to one of the home loan experts we work with.
Can I get an interest-only mortgage when I’m self-employed?
Although the Australian Prudential Regulation Authority (APRA) has lifted limits on interest-only lending, lenders are still cautious in their assessment of borrowers looking to secure an interest-only loan.
As a self-employed borrower you may find lenders scrutinising your financial records with extra vigour, but there’s no real reason why you wouldn’t be able to qualify for an interest-only mortgage, provided you meet lender requirements.
If you’ve been self-employed for fewer than two years and don’t have supporting documentation, it may be difficult to find a lender who will grant lending on this basis, but an independent broker may be able to help you find the right lender.
What about investment loans?
The basic lending criteria for most investment loans include stable employment so if you have fewer than two years’ financial records you might struggle to find a lender.
Don’t rule yourself out altogether though! The home loan experts we work with are expert mortgage brokers, if there’s a lender out there who will lend an investment loan to you, they are best positioned to know who they are. Get in touch for a free, no-obligation chat and see what they can do for you.
Can a self-employed person get an owner builder construction loan?
Lender criteria for owner builder construction loans can be tough to crack and many banks won’t lend on construction of new homes unless the build is taken on by licensed builders. Added to the difficulty of proving stable employment when you’re self-employed may cause difficulties when it comes to finding a bank willing to loan you the money.
For your best chance of success you would need at least 40% deposit so you are borrowing less than 60% of the cost of the property and the construction, unless you are a licensed builder constructing the property.
Get in touch for a free, no-obligation chat to get a clear idea of what this would mean for you.
How easy is it to get a mortgage when your partner is self-employed?
If your partner is self-employed and you’re looking for a joint home loan, you should be able to use their financial records to help secure the lending you are seeking. The above criteria discussed in this guide will still apply, but you should be able to find a lender who can help in these circumstances
Speak to an expert
The home loan experts we work with can help you find the right mortgage for the best available price, based on all your circumstances. As expert mortgage brokers they can use their knowledge and expertise to help you secure the lending you want at a price you like.
Get in touch for a free, no-obligation chat and let them help save you a whole heap of time, hassle and, potentially, money.