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Can a sole trader get a home loan?

When you choose to become a sole trader in Australia, you’re taking a professional and financial leap of faith that should be rewarded by banks when it comes time to take out a home loan. However, it’s important to be aware that the process of obtaining a home loan as a sole trader can differ from a traditional mortgage application.

This is because your job, income, and amount of time you’ve been employed in one role play a significant role in obtaining a home loan. Lenders need to assess your personal financial situation and credit history to ensure you meet strict lending criteria.

As sole traders generally are unable to provide traditional application documentation, such as a payslip from an employer, or they may face irregular payments from customers and clients, this makes loan applications more challenging.

Luckily there are home loan products and lenders geared towards helping sole traders get a foot on the property ladder and gain home loan approval. Instead, you may want to consider taking out an alt-doc home loan or a low-doc home loan.

Alt doc home loan and low doc home loan explained

There are three types of home loans: full-doc, alt-doc, and low-doc home loans. Keep in mind that some lenders may use alt-doc and low-doc interchangeably, but these are the generally accepted differences.

Full-doc, or full documentation home loans, are your traditional home loan in which a home buyer can access all the income verification documentation required by the lender. This may not be the best suit for a sole trader.

Alt-doc, or alternative documentation home loans, are a type of mortgage suitable for applicants who do not have access to traditional income verification documentation. A sole trader will instead provide evidence of the financial position of the business, with more details listed below.

If you’ve been a sole trader for less than two years, however, you may not be able to provide the above evidence for an alt-doc home loan. This is where a low-doc, or low documentation, home loan may be a better suit.

Low-doc home loans may just require you to self-certify your income, meaning you sign a declaration that your income is sufficient to service your loan repayments, often with confirmation from your accountant.

How does a sole trader qualify for a home loan?

Regardless of your employment status as a self-employed individual, you will still need to provide personal identification and income verification documentation with your home loan application. This may include:

  • Proof of identification, such as a passport or driver’s licence
  • Your Australian Business Number (ABN)
  • Evidence you’ve been employed in the same industry for at least 12 months.

You may include you provide at least two financial years’ worth of:

  • Company tax returns
  • Personal tax returns
  • Personal bank statements
  • Past notice of assessment
  • Past business activity statements (BAS)
  • Past notice of assessment
  • Profit and loss statement for the business
  • Balance sheet for your business (covering last 12 months)
  • Proof of ABN and GST registration for at least two years

How much can a sole trader qualify for with a home loan?

Just like for any would-be borrower, the amount of funds that a lender may approve a self-employed borrower for will depend on your financial situation, credit history and the financial status of your business. It also depends on the lender’s discretion, including the interest rate you may be offered.

The amount you can borrow, also known as your borrowing power, varies from lender to lender and depends on the type of documentation you can provide. The type of home loan you apply for will also influence the amount you can borrow.

  • For low-doc home loans: If you can only provide an accountant’s letter to verify your income, a lender may limit you to borrowing only up to 60% of a property’s value. Depending on the strength of your application, you may find some Aussie lenders willing to allow you to borrow up to 85% of the property’s value.
  • For alt-doc home loans: if you can provide two years’ worth of tax returns, BAS’s and other documents listed above, a lender may be able to lend you up to 95% of a property’s value.

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What are the benefits and risks of a sole trader home loan

The most significant advantage of choosing a low doc or an alt-doc home loan as a sole trader is that it allows you to meet the lending criteria, including proof of income requirements, set by Australian lenders. Otherwise, trying to obtain a home loan may be a more complicated process, with a greater risk of loan rejection.

However, it’s worth keeping in mind that lenders may view self-employed people and business owners as “riskier” applicants, despite their income levels. This is because your profits may fluctuate and be affected by seasonal changes, as well as external factors like the recent pandemic, unlike a borrower employed full-time who earns a regular income.

When opting for this type of loan, a lender may require you to provide a larger deposit. Generally, lenders will require borrowers to save up a deposit of at least 10%, but as this is a non-traditional home loan application, to lower any risk on the lender you may need to save at least a 20% deposit. This can be a tall ask where property prices are high, especially for sole traders based in Sydney and Melbourne.

Due to the higher level of perceived risk, you may also be asked to pay lender’s mortgage insurance (LMI) for when you borrow more than 60% of the property’s value, as opposed to the traditional 80%. Further, a lender may charge you a higher interest rate on average, depending on the documents you provide.

Can a sole trader have a guarantor for a loan

If you’re struggling to gain approval for a home loan, one option you may want to consider as a sole trader is engaging with a guarantor, such as close family, to support your application.

A guarantor home loan involves having someone else support your loan application by agreeing to take responsibility for servicing the mortgage repayments should you default. A guarantor may be able to support the entire loan amount, or the deposit so that you may avoid paying lender’s mortgage insurance.

By having a guarantor come on to your home loan you may not only be able to boost your chances of loan approval, but you may be approved for a lower interest rate or a larger borrowing amount. This is because having a guarantor on a home loan reduces the risk of default to the lender.

Can a mortgage broker help sole traders find a home loan?

A mortgage broker may be able to assist a sole trader in finding the right home loan and ideal lender. They may be able to provide expert advice pertaining to your specific financial situation, as well as provide several lenders that can service loans for sole traders.

It’s still worth considering doing your own research as a sole trader. A mortgage broker may only show you a small piece of the home loan pie, as they generally only have so many lenders on their books.

A comparison table however, like the one on this page, may be able to filter down and compare a wide range of home loan products from across the market. You may then be able to view loans side by side, and create a short list based on advertised rates and potential repayments.

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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