What you should know about freelancer mortgages
Getting a mortgage as a freelancer may be easy if you can prove that you get paid regularly. But make sure to check lenders’ terms for specific loan amounts.
Benefits of home loans for freelancers
Applying for a specialist freelancer mortgage could allow you to enjoy one or more
No Lender’s Mortgage Insurance (LMI)
Other special offers may be available to freelance or contract specialists applying for home loans.
A lower deposit / higher Loan to Value Ratio (LVR)
Special offers may be available to freelancers applying for home loans.
Lower interest rates & discounted fees
Other special offers may be available to freelance professionals applying for home loans.
Specialist home loans for freelance and contract workers
Many Aussies opt for freelance work in areas ranging from journalism and event management to information technology and healthcare consulting. While some of them earn well, they may not get paid on a set day of the month or week, as full-time corporate employees do.
Such irregularity in receiving income can be an issue in getting a home loan for freelancers, and most lenders may only offer lower loan amounts. If you’re a freelancer looking for a home loan, remember to ask the lender for their view on your income and the steps you can take to assure them that it’s stable.
On what terms can I get a mortgage as a freelancer?
When you apply for a home loan as a freelancer, lenders may only offer you a limited loan amount. Especially if you can’t submit at least two years of tax returns. Lenders check tax returns, especially for freelancers, to gauge a regular income. Different lenders assess your income through different calculations, for instance, by taking the average of the income reported on your tax returns for the last two years.
Some lenders may estimate whether you can afford loan repayments by calculating the debt service ratio (DSR), or the part of your earnings available for repaying your home loan. If your DSR is well above the lender’s acceptable range, your application can be rejected.
Lenders will also ask you to prove that you have the savings for the deposit, which your bank account statements can help confirm. You will probably need to submit three or six months’ bank statements, depending on the lender. If you don’t have the savings to pay a deposit of at least 20%, you may still have a few options available to you.
One option is to buy lenders’ mortgage insurance (LMI), which protects lenders in the case you fail to repay your home loan. Alternatively, you can show that you have at least 5% of your home’s value in “genuine savings” saved in your bank account or a term deposit in the past three months.
Apart from having a steady income and the savings to make a deposit, you will need to prove you have the borrowing power to repay the loan. This tells a lender about the risk they face of not getting their money back from you. You should remember that borrowing power isn’t just about your credit rating but also has to do with any debts you are yet to repay in full. If you have taken out a car loan or have outstanding credit card debt and are struggling to pay the repayments, that can suggest you don’t have much borrowing power. Consider asking your lender about their method for assessing your borrowing power.
You may find lenders more willing to approve your home loan application if you can show you are self-employed rather than a freelancer. The critical difference is that, as a self-employed worker, you’ll have to submit proof of registering for an Australian Business Number (ABN) as well as financial statements. If your annual business earnings are more than $75,000, you will need to show you are registered for GST as well.
How much can I borrow if I apply for a home loan for freelancers?
So you have the right income documents, adequate savings, and high borrowing power, and the lender approves your home loan application, but how much can you borrow? The lender will calculate how much you can borrow as a percentage of your home’s value, which is called the loan-to-value ratio (LVR). For instance, your home may be worth $500,000 with an LVR of 80% it means you can borrow $400,000.
The LVR offered on a home loan by your lender varies with your specific circumstances. You should remember that if you borrow more than 80% of your home’s value, lenders will ask you to pay for Lenders’ Mortgage Insurance (LMI). LMI protects the lender if you’re unable to repay the home loan. Here are some of the loan amount choices available to freelancers:
- LVR of 80%: This may be the most convenient option if you can prove you have the income and the deposit. You won’t have to pay LMI, and you may get a better interest rate.
- LVR of 90%: You will need to pay for LMI if you want to borrow 90% of your home’s value. Lenders may also scrutinise your home loan application more thoroughly, and you’ll need to show you have significantly high borrowing power. The trade-off for paying a lower deposit will probably be a higher interest rate.
- LVR of 95%: Lenders may accept a 5% deposit if you have genuine savings, which can be the amount saved in the last three months in your bank account or as a term deposit. Depending on the lender, a gift from your parents or inheritance may also count as genuine savings. Again, you should have an excellent credit history and low outstanding debts as well as a steady income.
- LVR of 105%: This would be a special case like a guarantor home loan which requires a guarantor, typically a family member who takes responsibility for repaying the loan if you can’t. You may not need to pay LMI for a guarantor home loan, which can bring down the cost of the loan. Additionally, once your outstanding loan amount drops below 80%, the lender may waive the guarantor requirement. However, this loan type may only be available for first home buyers.
Not all lenders offer all of the above options, and even when they do, the qualifying requirements can differ. It is advisable to research available loan options, from different lenders, before shortlisting a few lenders. You can discuss your specific circumstances with these lenders, and only then apply with the lender offering the most suitable home loan terms for you.
How can I reduce the costs when getting a mortgage as a freelancer?
As a freelancer, you should remember that some lenders may not let you borrow at all, and getting your home loan application approved can require a lot of work. The cost of the home loan can also vary based on the location of your home. For instance, if your home is in a newly developed area where property values are still not finalised, lenders may charge you more for the home loan. Again, if you borrow a sum that includes upfront costs such as stamp duty as well as the cost of your home, you may have to pay more for the home loan.
When applying for a home loan, you may be concerned about the interest on the loan. But you also need to consider other costs which vary based on the amount you are borrowing. For instance, if you borrow more than 80% LVR, you will need to pay for LMI. This can cost you a few thousand dollars, depending on the loan amount. Finding a lender who offers no or low LMI home loans for freelancers can save you a significant sum of money.
Monitoring your credit history, and ensuring you have sufficient borrowing power can get you better interest rates. If you’re currently repaying a short-term loan through large monthly instalments, you may not have much savings left. Consequently, your borrowing power will be lower. The ideal situation is one where you currently have very little debt, including credit card debt, but a rich history of borrowing and repaying money on time.
Depending on the lender, you may also be able to negotiate the interest rate on the home loan. Most lenders have multiple home loan products on the market, whether it’s their Standard Variable Rate (SVR), a fixed rate or a discounted rate for new customers. Compare the offers in the market and discuss with different lenders if they would be willing to match the competitors offer. If you’re taking out a home loan to buy your first home, check if you qualify for a first homeowner grant which can lower the amount you need to borrow, reducing the cost to you.
Freelancer mortgage calculators: what do you need to know?
A mortgage calculator, sometimes also called a serviceability calculator, can help you find ways to lower the cost of your home loan. Those applying for a home loan for the first time may use these calculators to understand their home loan better. When using a mortgage calculator, you’ll usually need to input the cost of the home, the proposed loan term, possible interest rate and type of interest and possibly the repayment frequency.
Using a calculator, you can check how choosing an interest-only home loan affects the interest you will pay. Choosing to pay back the principal of your loan at a later time can increase what you pay for the home loan in total. However, for freelancers, such a setup may help with cash flow, plan your savings and make sure you have enough money in the bank to take care of the larger repayments down the track.
For those working freelance, mortgage calculators can help you see if you can reduce the interest rate by making lump-sum payments. Or see if scheduling your repayment in a way that suits you affects how much you pay for the home loan.
Some mortgage calculators use the same method as many lenders for calculating home loan costs. Which means you may get a realistic estimate of your mortgage repayments. Also, the online mortgage calculators on lenders websites usually include lenders’ fees and service charges, making it easy to shortlist lenders. However, you should remember that the calculations online are not based on your exact situation. You’ll need to discuss your circumstances with the shortlisted lenders before deciding on a suitable home loan. You could also consult a mortgage broker or advisor before approaching a lender if you are unsure of the offers or are facing unusual financial difficulties.
Can freelancers get home loans through a mortgage broker?
For those working freelance, mortgage brokers can be helpful in several ways, most crucially in ensuring that you apply for the most appropriate home loan with the right lender.
With the perspective and experience of an industry insider, they can guide you through the home loan terms offered by different lenders. And then based on your income and savings and suggest a lender likely to offer a suitable home loan. Mortgage brokers can also advise you on approaching a non-bank lender, if necessary.
Some of the questions you may have as a freelancer that mortgage brokers can answer, include:
- How does a negative incident on your credit history affect your chances of getting a home loan?
- If you are working on a long-term project but one with irregular payment cycles, will lenders consider your income as unstable?
- Should you consider a lender’s recommendation for borrowing more than 80% LVR, which involves paying LMI?
- Can the mortgage broker recommend a low or no LMI lender?
- When should you consider applying for a guarantor home loan?