Home loans for contractors

The world of work has evolved rapidly over the past few years. Both businesses and employees around the country have realised the benefits of working as or with contractors. In Australia, over one million people were working as independent contractors in 2018. This number has been steadily increasing with further growth fuelled by the changes that happened during the pandemic.

Last year, Australia’s leading recruitment agency, Robert Half, predicted a 70:30 split between permanent and temporary employees in the Australian job market by 2023, illustrating the growing contribution of contractors to the country’s economy. Yet, lenders often don’t take a favourable view of the earning potential and income of contractors. Research shows that 26 per cent of Aussies turned down for a loan were refused because they were either self-employed or working part-time.

Before you let out an exasperated sigh, you should know you may still qualify for a home loan as a contractor, self-employed or part-time worker. However, all lenders have different lending policies and these have further changed during the COVID-19 crisis. It’s, therefore, a good idea to apply with lenders that have lending policies which are advantageous contractors or freelancers.

You can contact lenders directly to explore your options or speak with a mortgage broker about lenders they recommend as more likely to approve your mortgage application.

When you apply for a home loan, your income is perhaps the most important consideration for approval. Lenders evaluate two things when looking at your income. First, can you afford to make the repayments on your home loan? Second, would you be able to maintain the payments in the future?

Contractors and freelancers often don’t earn fixed income each month, which makes it a challenge for them to get approved for a home loan. However, some lenders offer home loans to this growing group of workers in Australia. By finding the right lender, you can secure a competitive home loan deal with features tailored to your requirements. Here are some factors to consider before applying for a home loan on a contractor income:

• Type of income, what work arrangements you have in place currently and in the future
• Experience in the industry. Generally, borrowers with more than two-year’s experience are preferred
• Your living expenses, existing debt and financial commitments
• Your financial and borrowing history as well as your credit score
• What is the purpose of the home loan (residential or investment property loan)
• Whether you are applying independently or with other applicants
• The amount that you are looking to borrow
• How much deposit have you saved, which will establish your Loan to Value (LVR) ratio

The success of your home loan application depends on your circumstances and the lenders’ policies. You may have fewer lenders to choose from as a contractor, but you can still land competitive deals from smaller banks and non-bank lenders.

• Compare home loan deals or speak to a mortgage broker if you need assistance with your mortgage application.

Contractors are paid in different ways. Understanding your income type will help you narrow down your loan options. Specifically, you need to determine whether a lender will consider your income as a PAYG (Pay-As-You-Go) employee or a self-employed contractor. 

PAYG Contractors

PAYG contractors take up jobs for a fixed term with one primary employer. They receive regular payslips, on a monthly or fortnightly basis. PAYG contractors also receive benefits like sick leave and holidays, automatic tax withholding and contributions to super from the employer during the term of their employment. 

If you’re applying as a PAYG contractor, lenders will review your salary by looking at your financial history for the past few years. Some lenders may also include overtime pay in your assessable income if you do shift work and receive overtime payments regularly.

Self-Employed Contractors

Self-employed contractors work as sole traders and may work with multiple clients. They don’t receive any leave benefits, a regular salary or payslips. They must have an ABN (Australian Business Number) to invoice their clients to get paid.

Besides the two broad categories of self-employed and PAYG contractors, there are lots of subcategories of contractors, including:

IT Contractor or IT Consultant

IT contractors are some of the best-paid workers across the country due to high employer demand and low risk. Yet, many lenders don’t understand the nature of the industry and decline their home loan applications. If you’re an IT contractor, be diligent enough to pick the right lender before applying for a home loan to reduce your chances of rejection.

Mining Contractors

Mining contractors are highly paid individuals, but often work on short-term contracts. This can be a challenge for mortgage approval, but some lenders follow a practical approach while analysing your application. Such lenders understand that mining contracts are quickly replaced, if not renewed, without impacting your repayment potential, which increases your chances of approval considerably. 

Journalist or Freelance

Contractors working as journalists or freelancers are paid on a per-work basis, like an individual article or project. If you work as a freelancer, you would typically need to provide your tax returns for the past two years to substantiate your income for your home loan application.

Subcontractor

Subcontractors are a unique category of contractors. They can be employed on either a PAYG or self-employed contractor basis. Subcontractors are very common in industries like IT, construction, and mining, where they are externally commissioned, often with lucrative pay-outs. If you are applying for home loans for subcontractors, it will help to establish your income type first, to determine the home loan options available for you.

Once your income is established as PAYG or self-employed, your lender will balance your income with your expenses to calculate your liabilities. Your liabilities will include your monthly bills, credit cards and cost of living estimated by the lender. The total of your regular expenses, as calculated by the lender, is subtracted from your income to see if you have enough to make regular repayments on your home loan. If you plan to apply for a home loan soon, it is a good idea to control frivolous spending. This will add to your savings and increase your credibility as a borrower by increasing the cash at your disposal each month for making future repayments.

With everything else in place, you can generally borrow up to 80 per cent of the property price without making any additional payments. If you’re in a strong financial position, some lenders will loan you over 90 per cent of the property’s price. You will need to pay for Lenders Mortgage Insurance (LMI) which will protect them if you default on your home loan in the future. The amount of LMI payable depends on the size of your loan. You can get an estimate by crunching the numbers using an online LMI calculator. It’s also possible to roll your LMI premium into the loan amount to avoid making an upfront payment.

Contractors can also borrow more than the standard 80 per cent by providing a guarantee to secure their home loan. Parents, siblings, or grandparents can use their property and good credit history to guarantee your home loan and increase your borrowing capacity significantly.

Certain contractors like medical professionals may be considered low risk by lenders and eligible for LMI waivers and special discounts on their home loans. You can visit the medical professionals home loan page for more information on the topic.

As you can see, each type of contractor is treated differently by lenders. While your income is generally going to be acceptable, it all boils down to providing the right information to prove your income to get a home loan approved. For starters, most lenders expect you to be contracting for at least two years before you can get a home loan. If you’ve recently started contracting, you may have fewer options available. Still, it’s worth speaking with lenders directly or a mortgage broker for a more accurate assessment.

You will also need to provide some additional documents along with the standard set of documents like identity and income documents that accompany a home loan application. While the requirements may differ slightly between lenders, you would generally need the following documents when applying for a home loan as a contractor. 

If you’re a self-employed contractor, you will need:

• Your two most recent tax returns
• Quarterly Business Activity Statements (BAS)
• Invoices raised in the past three months
• Last three months bank of statements
• Employment contract with your principal employer, if you have one

If you’re a PAYG contractor, you will require:

• Two recent payslips
• PAYG summary or group certificate
• Last three months of bank statements 
• Employment contract
• A letter from your employer

Depending on the type of contractor income you make and your lender’s policies, you may be asked to provide additional documents than what is listed above. You can ask your lender to provide you with a comprehensive list so that you don’t miss anything. If you’re working with a mortgage broker, they can help you prepare  your home loan application without missing any important details.

No, you don’t need a mortgage broker to get a home loan as a contractor or part-time worker. It is entirely your call whether you want to contact lenders directly for your home loan or seek tailored recommendations from a mortgage broker.

If you’re applying directly, do proper research to find a lender that will use a common-sense approach to judge your home loan application. On the other hand, if you do decide to work with a mortgage broker. You’ll benefit from expert financial advice and information about home loan deals from lenders that are more likely to assess your application favourably. Brokers work with several lenders and stay up to date on the deals and eligibility criteria of most lenders. This equips them to provide you with financial advice about your home loan eligibility and options. Brokers may even have access to unique offers that they pass on to customers, leading to more savings in your kitty.

Ultimately, it is your choice to work with a mortgage broker or not for purchasing your new home. Either way, you can kickstart your home loan journey by comparing home loan deals from multiple lenders in Australia.