Working for yourself can be a dream for many, with flexible hours and the potential to earn more than you would in a standard 9 to 5 job.
However, one of the downsides emerges when it’s time to apply for a home loan. Salaried employees have it much easier when it comes to proving their income with payslips. For sole traders, irregular payments can be a bit of a hurdle.
Luckily there are home loan products and lenders geared towards helping self-employed people realise their property goals.
How can I apply for a sole trader home loan?
If you’re a sole trader, the legal responsibility for all aspects of your business lies solely with you, including losses and debts. In this scenario, lenders may offer you a specialised home loan known as a low documentation loan, also called a low doc loan. Since you’re unable to provide salary slips to verify your income, it is possible to apply for this loan using alternative means of documentation.
Some lenders will require many documents for approving a sole trader home loan, such as notices of assessments, tax returns, and an accountant’s letter proving your income. However, there are also those who will be satisfied if you can provide tax returns for the last two years or your recent profit and loss statements.
I’ve been a sole trader for no more than two years. What are my options?
Sole traders who started their business less than two years back and don’t have tax returns to prove their income are unfortunately viewed as too much of a financial risk by most lenders. However, if you’ve been working in the same industry for many years before starting your business, some lenders may be willing to consider your income from your previous job and accept that you can afford the home loan. This is often done on a case-by-case basis.
For instance, say you’re a sole trader, operating a plumbing business for less than two years, but you’ve got experience of working in the industry for over seven years. In such a scenario, some lenders may consider your combined experience and work history as enough evidence to approve your application for a sole trader home loan. You may have to prove you’re less of a liability another way though, such as having a large deposit or spouse supporting your application.
What do I do if I don’t have a strong financial history?
If you’re late on your tax or are unable to provide other financials, a low doc home loan offered by many lenders may be an option. Your application for a sole trader home loan via the low doc option may be accepted, provided you present at least one of the following:
- A 12 months business transaction account statement
- The latest 12 months of Business Activity Statements (BAS). Some lenders might accept six months BAS if you can demonstrate strong financials
- An accountant’s letter supporting your income claim.
However, there are certain disadvantages to opting for a low doc loan, such as:
- A larger deposit requirement: Most lenders require 5-10 per cent of the purchase price with a standard home loan, but with a low doc loan you might have to put up 20 per cent.
- A higher interest rate: This could differ from lender to lender and also depends on the kind of supporting documents you’re able to provide.
- A higher Lenders Mortgage Insurance (LMI) premium: LMI is an insurance premium paid by you to the lender when you borrow 80% or more of the property value. But with a low doc loan, LMI comes into play if you’re borrowing more than 60% of the property value.
How much loan can I get with a sole trader home loan?
The amount you can borrow varies from lender to lender, and also depends on the type of documentation you can provide.
- For a loan of up to 60-85% of the property value: If you can only provide an accountant’s letter verifying your income, some lenders will allow you to borrow only up to 60% of the property value. There are, however, some specialist or non-conforming lenders who might allow you to borrow up to 85%, depending upon the strength of your application.
- Get a loan of up to 95% of the property value: You may be able to apply for a full doc loan and borrow at more competitive interest rates if you can provide two years tax returns along with notice of assessments (NOAs). Additionally, some lenders will also ask for two years Australian Business Number (ABN) statements, and ask that you fulfil all other standard serviceability requirements.