Self-employment in Australia has been steadily on the rise over the past 15 years as more and more people move away from the traditional five-day week, working for a large company or government organisation. A self-employed person is generally defined as someone who does not receive a regular salary from an organisation. This could include anyone running their own business, farm or professional practice. In 2021, 2.2 million Australians identified as self-employed, a 7.2% rise since 2010, and that number has undoubtedly increased post-pandemic.
Yet, despite this rise in numbers, many self-employed people still find it challenging to get a mortgage because they feel that lenders believe they are a higher risk due to a lack of income stability. This doesn’t mean that, as a self-employed person, you are precluded from getting a mortgage on your terms. It just means you’ll usually be required to provide more paperwork to prove that you meet the lender’s more stringent financial requirements.
Below are nine tips for getting the best possible mortgage when self-employed.
1. Examine your options
As a self-employed person and a first-time home buyer, your mortgage to-do checklist will be longer because there are a few extra things to consider. Instead of just providing a few payslips like a salaried employee, you’ll need to show earnings for at least 12 months, but usually 24 months, to be eligible.
Your self-employed income is also open to interpretation, depending on the lender. Most like to see tax returns for at least two years, so they can get an average that accurately reflects your earnings. Not every bank uses the same methods for calculation. Some will include things such as depreciation and any additional superannuation you may have paid to arrive at what they deem a realistic figure. They will also generally look at your net profits before tax.
There are exceptions. For example, suppose you’ve been a salaried electrician or accountant for five years, and you just started out on your own 12 months ago. In that case, the bank will look at your regular income over a longer period, your savings and the size of your deposit. If you have been self-employed for less than 12 months, you may struggle to obtain a mortgage at all. However, you may have to consider either waiting or going down the low-doc loan route if you can’t wait to buy a property.
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2. Do a thorough budget to see what you can afford
It’s a good idea to map out a budget to see what you can actually afford, as opposed to what a bank will lend you, regardless of your circumstances. This is especially true if you’re self-employed because you often won’t be able to rely on a regular income to make your monthly repayments, especially if it’s seasonal in nature. That means taking into account all the expenses of a mortgage as well as having sufficient savings for any lean times should they eventuate.
One way to assist with your budget is to use a self-employed income calculator. These tools take things such as net profit before tax and depreciation into account. Once you have a clearer idea of your income, you can budget accordingly, preferably with a savings buffer in case of an emergency.
3. Check your credit rating
Having a good credit rating is not absolutely essential for obtaining a mortgage. Still, it goes a long way towards getting one you are comfortable with, especially if you’re self-employed. Make sure you pay your bills on time, especially your credit cards, so your rating is high when you apply.
If your credit isn’t good for whatever reason, you can always delay your mortgage application until it improves. This will make the entire process run far more smoothly.
4. Get a good deposit together
The bigger your deposit, the less you’ll need to borrow for your mortgage. The minimum deposit required is 10% of the property’s value. However, if you deposit less than 20% of the property’s value, you may have to pay lenders’ mortgage insurance. Additionally, some lenders require an even higher percentage for the self-employed.
You can obtain a mortgage with less than that if you have a guarantor. Yet, demonstrating that you can save for a deposit is something lenders look upon favourably as it shows you are serious about making a long-term financial commitment.
5. Talk with a mortgage broker
Talking to a mortgage broker is always a good idea. They can assist and support you when you fill out your application and, hopefully, find you a competitive deal. Mortgage brokers are free to talk with (their commission comes from the lender) and are experts in their field, so it should be a win-win. Additionally, it’s highly likely that someone you know can recommend a mortgage broker they’ve used before.
6. Discuss your tax return with your accountant
Having a clever accountant could be a double-edged sword when applying for a mortgage as a self-employed individual. They may be able to help you minimise your tax bill and your net profit, but you’ll need to show good earnings to obtain a mortgage. You should have a proper discussion with them, especially around tax time. That way, you can agree on the best way forward that doesn’t jeopardise your chances of getting a mortgage.
7. Keep good financial records
Self-employed mortgage applications are naturally complicated, so anything that can expedite the process is a good thing. So, you should always have at the ready any supporting documentation from your accountant in a way that’s easy for your lender to cross-reference. These include your personal tax returns supported by the Australian Taxation Office’s notice of assessments. You also should have any partnership information, balance sheets or other information that your accountant deems necessary.
8. Get income insurance
Unfortunately, things go wrong in life. Part of your budgeting process should involve doing a worst-case scenario where you lose your primary source of income. Income insurance is not overly expensive and could be vitally important if you have an accident or medical emergency in the future that affects your ability to make your repayments over the next 20 or 30 years.
9. Shop around
Finally, being self-employed doesn’t mean you can’t get an optimal mortgage with a highly competitive interest rate and other good terms and conditions. Remember, there’s plenty of competition in the marketplace, so you don’t need to be desperate. You also don’t need to take a loan with the bank you’ve been with since you were a kid — especially if they aren’t flexible. Once again, it’s a good idea to talk to a mortgage broker who should be able to offer you a wide array of choices.