Find & Compare Self-Employed Home Loans | September 2020 | RateCity
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It can be harder to get a home loan if you’re self-employed, whether you’re working as a contractor, freelancer, sole trader or small business owner. If you don’t receive a regular salary from an employer, it can be much more difficult to convince a bank that you’re a reliable borrower who can afford your mortgage repayments. As a result, many banks are less likely to risk lending you the money to buy a property.
However, there are some lenders who specialise in mortgages for self-employed borrowers, and assess potential borrowers using different criteria. There are also steps that self-employed borrowers can take to help improve their chances of being approved for a home loan with a bank or other lender.
What are the requirements for a self-employed home loan?
To successfully apply for a home loan as a self-employed borrower, many banks will want you to show you’ve been self-employed for at least two years, demonstrating that your business is stable and you have the skill and experience to earn a steady income from your work.
If you’ve been self-employed for less than two years, you may still be able to apply for a home loan under certain circumstances. If you’ve been self-employed for at least one year, and previously worked in a related industry, this may help to reassure potential lenders that you have the skills and experience required to make it on your own as a self-employed borrower. Plus, if things don’t go well, you may be able to return to your old job and receive a similar income.
If you’ve been self-employed for six months or less, you may find it much more difficult to get a home loan. Until the bank can be confident that you can earn a stable living as a self-employed worker, they may not be willing to risk lending you money.
Alice has been working as a self-employed graphic designer for two years now, and receives a steady income from a range of clients. Her bank is willing to consider her application for a home loan, as she has demonstrated she has the skills and experience to maintain a stable income from her business.
Behrouz has been working as a self-employed electrician for 12 months, but previously worked for three years at an electrical repair company. When he applies for a home loan, the bank is confident he has the skills necessary to keep finding steady work in his industry, through they’d prefer if they could be more confident in his ability to manage a business.
Con has worked in IT for years, but six months ago decided to follow his passion for cooking by opening a restaurant. When he applies for a home loan, his bank isn’t confident that his business will last – it hasn’t been open for long, and he has no previous hospitality experience. Until he can demonstrate his ability to make a self-employed living from his restaurant, Con may have to explore other options to own his own home.
Low doc home loans for the self employed
Low documentation or “low doc home loans” are mortgages that don’t require as much paperwork to apply for as other home loans.
Low doc loans can be handy for self-employed Australians who want to buy a property but aren’t able to provide the payslips and similar proof of income documents that a salaried employee could offer.
When a bank provides a loan to a borrower with less paperwork, they’re taking a bigger financial risk, as there’s less proof available to show that the borrower can afford the loan and will pay the bank back. This means low-doc home loans are more likely to charge higher interest rates and/or higher fees than other mortgage options, to make up for the higher risk.
Also, much like a typical home loan, low-doc loans require the borrower to pay for Lenders Mortgage Insurance (LMI) if the Loan to Value Ratio (LVR) is too high.
While many home loans require LMI if the LVR is higher than 80% (e.g. if you have a deposit smaller than 20%), some low-doc loans require extra security, and charge you LMI if your LVR is higher than 60% (e.g. if you have a deposit smaller than 40%).
If you’re unable to afford such a large deposit for a low doc loan, you may be able to secure a low doc loan using other assets, such as equity in another property, a car, or shares. Your lender or mortgage broker can provide more information on what options may be accepted.
What do you need for a low doc mortgage?
Different lenders have different requirements for their low doc home loans, though you usually need to be able to prove the length of time you’ve spent as a self-employed worker.
Some of the more common examples of the paperwork you may need to provide include:
- Your ABN and/or Certificate of Incorporation
- Business Activity Statements (BAS), verified by the Australian Tax Office (ATO)
- Confirmation that your income has been registered for GST
- Bank statements for your primary business or personal transaction account
Using one or more of these documents, your lender can get an idea of your self-employed income and calculate whether you’re likely to afford one of their home loans.
What about no-doc loans?
No-doc loans don’t require proof of income from the borrowers, making them much riskier for banks to provide and quite rare to find in Australia, due to the increased regulation in the mortgage industry.
While many of the larger banks have ceased offering no-doc home loans, some smaller specialist lenders may still offer no-doc home loans.
Due to the higher risk involved, no-doc home loans are much more likely to require higher deposits, additional security, tighter repayment restrictions, and higher interest rates and fees.
Can I get a self-employed home loan with no deposit?
Because low-doc loans for self-employed borrowers tend to carry greater financial risks than more typical home loans, many banks will want a deposit from a borrower up-front, and often a larger deposit than they’d ask for with a more typical home loan e.g. 40% of the property value rather than the more usual 20% deposit.
If you can’t afford a large deposit, you may still be able to apply for a self-employed home loan with the help of a guarantor.
A guarantor is a close relative (often a parent) who can guarantee your home loan using the equity in a property of their own. If you were to default on your mortgage repayments, your home loan would become the guarantor’s responsibility.
Self-employed borrowers may be able to use a guarantor’s help to apply for a home loan with no deposit, however the guarantor will still need to fulfil the lender’s eligibility criteria e.g. having a good credit history, holding enough equity in their own home, having sufficient income available. Ultimately, different lenders will have different requirements.
Plus, being a guarantor can affect someone’s credit score, making it more difficult for them to borrow money for themselves. It’s important that any potential guarantor is aware of the financial risks and responsibilities involved in the role.
Senior Financial Writer
Mark Bristow is a senior financial writer for RateCity and an experienced analyst, researcher, and producer. Working for over ten years, Mark previously wrote and researched commercial real estate at CoreLogic, and has seen articles published at Lifehacker and Business Insider, among others. Most recently, Mark has joined RateCity working across finance as a whole. Whatever the topic, Mark’s goal is always to provide simple solutions to complex problems.
How can I get a home loan with bad credit?
If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.
One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.
Two points to bear in mind are:
- Many home loan lenders don’t provide bad credit mortgages
- Each lender has its own policies, and therefore favours different things
If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.
Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:
- You have a secure job
- You have a steady income
- You’ve been reducing your debts
- You’ve been increasing your savings
Can I get a home loan if I am on an employment contract?
Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.
If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.
Are bad credit home loans dangerous?
Bad credit home loans can be dangerous if the borrower signs up for a loan they’ll struggle to repay. This might occur if the borrower takes out a mortgage at the limit of their financial capacity, especially if they have some combination of a low income, an insecure job and poor savings habits.
Bad credit home loans can also be dangerous if the borrower buys a home in a stagnant or falling market – because if the home has to be sold, they might be left with ‘negative equity’ (where the home is worth less than the mortgage).
That said, bad credit home loans can work out well if the borrower is able to repay the mortgage – for example, if they borrow conservatively, have a decent income, a secure job and good savings habits. Another good sign is if the borrower buys a property in a market that is likely to rise over the long term.
Can I change jobs while I am applying for a home loan?
Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements.
If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out.
How do I take out a low-deposit home loan?
If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.
Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.
How common are low-deposit home loans?
Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.
However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.
Who offers 40 year mortgages?
Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank.
Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.
How do guaranteed home loans work?
A guaranteed home loan involves a guarantor (often a parent) promising to pay off a mortgage if the principal borrower (often the child) fails to do so. The guarantor will also have to provide security, which is often the family home.
The principal borrower will usually be someone struggling to find the money to enter the property market. By partnering with a guarantor, the borrower increases their financial power and becomes less of a risk in the eyes of lenders. As a result, the borrower may:
- Qualify for a mortgage that they would have otherwise been denied
- Not be required to pay lender’s mortgage insurance (LMI)
- Be charged a lower interest rate
- Be charged less in fees
What are the pros and cons of no-deposit home loans?
It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.
The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.
But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.
What is a low-deposit home loan?
A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.
For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.
As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.
What is a debt service ratio?
A method of gauging a borrower’s home loan serviceability (ability to afford home loan repayments), the debt service ratio (DSR) is the fraction of an applicant’s income that will need to go towards paying back a loan. The DSR is typically expressed as a percentage, and lenders may decline loans to borrowers with too high a DSR (often over 30 per cent).
What if I can't pay off my guaranteed home loan?
If you can’t pay off your guaranteed home loan, your lender might chase your guarantor for the money.
A guaranteed home loan is a legally binding agreement in which the guarantor assumes overall responsibility for the mortgage. So if the borrower falls behind on their mortgage, the lender might insist that the guarantor cover the repayments. If the guarantor fails to do so, the lender might seize the guarantor’s security (which is often the family home) so it can recoup its money.
Who has the best home loan?
Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.
To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you.
How do I know if I have to pay LMI?
Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.
If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.
What happens to my home loan when interest rates rise?
If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.
When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.
There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.
What happens when you default on your mortgage?
A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.
If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.
You may also want to talk to a financial counsellor.
How personalised is my rating?
Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating.
We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time.
How often is your data updated?
We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.
How can I get a home loan with no deposit?
Following the Global Financial Crisis, no-deposit loans, as they once used to be known, have largely been removed from the market. Now, if you wish to enter the market with no deposit, you will require a property of your own to secure a loan against or the assistance of a guarantor.
How much of the RBA rate cut do lenders pass on to borrowers?
When the Reserve Bank of Australia cuts its official cash rate, there is no guarantee lenders will then pass that cut on to lenders by way of lower interest rates.
Sometimes lenders pass on the cut in full, sometimes they partially pass on the cut, sometimes they don’t at all. When they don’t, they often defend the decision by saying they need to balance the needs of their shareholders with the needs of their borrowers.
As the attached graph shows, more recent cuts have seen less lenders passing on the full RBA interest rate cut; the average lender was more likely to pass on about two-thirds of the 25 basis points cut to its borrowers.