While the freedom of the gig economy is financially rewarding, you would think twice in doing so, especially if you’re planning to get a home loan. In 2017, around 26% of Australians were knocked back for a mortgage. One reason for this is because they’re self-employed.
Good thing, several Australian lending institutions have been paying attention to these common financial difficulties among homebuyers who are either self-employed or working part-time. So how to get home loans if you’re working independently in Australia?
Self-Employed Home Loan Application
If you’re self-employed and want to apply for a mortgage, Australian lenders will require you to hand in your tax returns for the past 24 months, as well as the letters from your accountant. Apart from these, financial institutions would look for at least two years of proof of your solid income.
Lenders would also check whether you’re really self-employed who can be eligible for a home loan intended for independent workers. Typically, they will require you to be or check the following:
- Two years of self-employed experience (keep old payslips and get references for proof)
- Less than one year experience (not all lenders allow this)
- Track industry data
If you don’t want to submit financials or tax returns, a low doc home loan can be your best option. We’ve summarised the most important points between a tax return for a home credit and a low doc home loan here.
You can apply for a home loan even without regular payslips. Lenders can assess a self-employed borrower’s income based on formal tax assessments. So if you’re freelancing, make sure to demonstrate a history of income through your tax returns.
Prepare documentation of the most recent full tax return for the past two years that’s signed, certified, and backed up by notices of assessment. The thing is, many would fudge their tax return and downplay their income.
While banks like profitability, tax professionals, and accountants have eyes on tax minimization. Long story short, your borrowing capacity can be lower if you have lower your taxable income, or worse, you may not be qualified for a home loan.
Don’t profess that you earn more, too. You don’t want to be flagged for a tax audit. If you’re planning to purchase a house in a year or so, speak to accounting professionals and let them know about your potential financial need to maximize your income for that purpose, instead.
One way accounting professionals or even lenders can help you is through adding back expenses. Taxable income can be reduced through add-backs, which are expenses that you’ve incurred but aren’t “real” expenses or ongoing commitments.
Here are a few examples of expenses that financial institutions can add back to improve your assessable income and eventually your borrowing power:
- Car Allowance/Company Car
- Depreciation on Taxable Assets
- Excess superannuation contributions
- Interest expenses
- Net profits you retain in a company
- Non-Cash Expenses
- Non-Recurring Expenses
- NPBT or Net Profit Before Tax
- One-off expenses
- Trust distributions
Lenders May Potentially Miscalculate Your Income
You read it right. There are times when financial institutions can make mistakes in calculating the income of self-employed borrowers. Typically, it’s the assessor’s lack of understanding, double-dipping, and, believe it or not, procrastination that can cause these miscalculations.
If this happens, especially for complex loans, you should get in touch with the assessors. Walk them through your finances to ensure that they’ll assess your loan precisely. It’s best to ask professional advice from a mortgage broker. If you’re in Sydney, this site precisionfunding.com.au can help you.
Low Doc Home Loans
If you don’t have access to the typical requirements required to obtain a traditional home credit, you can opt for low documentation (or low doc) home loans. This is especially recommended for small business owners and self-employed individuals with no financial statements, PAYG or pay-as-you-go payslip records, or even tax returns.
Low doc property loans were first introduced by Australian mortgage brokers and other non-bank lenders during the late 1900s. However, it just recently became a mainstream product in the niche market.
In a low doc home loan, you’ll have to sign a declaration confirming your income. Then, a lender will assess your credit based on what you had declared. Because of this nature, unfortunately, borrowers are forced to pay higher interest rates and a bigger deposit.
Again, keep in mind that lenders charge higher rates for low-doc loans. When the credit has been set up, they may charge you with a one-off fee like Lenders Mortgage Insurance (LMI), too, which is typically 60% of the property value. Your borrowing capacity will be lowered, as well.
Loc-doc home loans are called “low”-doc and not “no”-doc because lenders would still look for other specific documentation like the following:
- ABN or Australian Business Number
- Registered Business Name (for business owners)
- BAS or Business Activity Statement (indicating your annual revenue)
- Business Banking Statements (for the last 12 months)
- Letters from Your Accountant (confirming your net income)
- Signed Borrower’s Income Declaration (indicating your income)
- Older Tax Returns (for the past 24 months)
- Profit and Loss Statements/Management Accounts
- Registered for GST or Goods and Services Tax (at least 12 months)
More importantly, lenders prefer borrowers with clean credit histories, a maximum borrowing of 80% of a property’s purchase price, full property valuations, and no second home loan on that said property.
In terms of interests and fees, the borrowed large sum of money is applied in the increased cost charges. That is to say, low doc and no-doc applicants may suffer from higher financial risks. It’s best if you can do your sums before jumping in.
In a nutshell, a low doc home loan doesn’t require complicated requirements compared to that of the tax return. Having said that, its main disadvantages include higher interest rates, higher deposit requirements, high-cost LMI charges, and lower borrowing capacity.
If you’re a contractual/temporary employee or a freelancer, there’s no need to fret over lumpy cash flow or over-complicate your business affairs just to be eligible for a mortgage. Nowadays, you can always trust your up-to-date tax returns and opt for low-doc home loans.