Years ago, the big banks wouldn’t lend to the self-employed, but that’s all changed now with online lenders increasing the competition in the home loan market. You can take an in-depth look at the best home loans for self-employed workers, the documentation you’ll need and all the features on offer right here with Savvy. Comparing home loans here offers an opportunity to find out about the lowest interest rate loans in Australia and the best deals available for you.
In the past, sole traders and small business owners used to struggle to get home loans. This was because self-employed people couldn’t provide payslips (and sometimes had fluctuating incomes) and lenders deemed them to be riskier borrowers as a result.
However, as more people became self-employed in Australia, online lenders (followed by the banks) altered their application processes to accept other proof-of-income documents besides PAYG payslips. Home loans for self-employed Australians (also known as sole trader home loans in Australia) are now essentially the same as standard loans and can come with low interest rates and a variety of loan features to choose from.
If you’ve been self-employed for over two years and have a good credit history, you can confidently apply for some of the best home loans for self-employed people available in Australia. To prove your income to the lender, you’ll need to provide two years’ worth of tax returns for yourself and your business, plus your ABN and ACN certificates.
Home loans for workers self-employed for under two years are now also available. However, they may be harder to get approved and you may need to apply to an online lender who specialises in what’s called ‘non-conforming’ or ‘specialist’ loans. If you’ve been self-employed for under two years, be prepared to pay a higher interest rate and fees on your low doc loan.
For these loans, you’ll still need to prove your ID and supply asset and debt information. The alternative documentation you may be asked to provide for a low-doc loan could include Business Activity Statements, bank statements, profit and loss statements and ABN and GST registration documents. Some lenders will also ask for a letter from your accountant verifying your financial position.
Sole trader or self-employed mortgages for people with full documentation usually require a deposit of 20% of the value of the property you wish to purchase. However, there are full doc home loans available for self-employed Australians which only require a 5% or 10% deposit. These loans are known as 95% or 90% loan-to-value ratio (LVR) loans, respectively, because the lender is prepared to lend 90% of the value of the property to be purchased. Because the lender is providing a higher proportion of the total cost of the property, they’re taking on more risk and will often charge you a higher interest rate.
Such high LVR loans often come packaged with the need to take out Lenders Mortgage Insurance (LMI), which is an insurance premium which protects the lender in case of mortgage default. LMI can amount to thousands of dollars and can add significantly to the overall cost of the mortgage.
Self-employed Australians applying for a low doc loan should expect to be asked to provide an absolute minimum of 20% to 30% deposit, and also to take out Lenders Mortgage Insurance, which will be calculated based on the loan amount. In most cases, LMI would be required for any loan above 60% LVR (or less than a 40% deposit).
Another option for those who can’t provide a sufficient deposit is a guarantor mortgage. This type of mortgage is offered to borrowers who have a family member who is prepared to act as a guarantor for their loan. The guarantor has to be prepared to accept responsibility for the repayment of the loan in the event the borrower is unable to make their home loan repayments. They’ll have to offer the equity in their own home as security for the new mortgage. If the guarantor has a very good credit history and plenty of free equity in their home, lenders may even be willing to lend up to 100% of the cost of the property in some cases.
Offset accounts can save you plenty of money by reducing the interest you pay on your loan. Each dollar you deposit in your offset account will reduce the interest you pay on a dollar-for-dollar basis. For example, if you have a $200,000 mortgage and $20,000 in your offset account, you’ll only pay interest on $180,000.
If business is booming and you have some spare cash, making extra repayments is a great way to reduce the size of your mortgage by paying it off more quickly and saving on the interest you pay. Look for a loan where you’re able to make as many additional repayments as you like without additional fees.
If business slows down, you might find yourself in need of extra funds, which you may be able to access if your home loan offers a redraw facility. Redraws allow you to access any additional payments you’ve made into your home loan account. However, you may have to apply to your lender for permission to redraw.
The standard loan repayment frequency for a home loan is monthly, meaning you pay 12 instalments per year. However, if your lender allows you to pay your mortgage fortnightly or even weekly, you can save yourself thousands in interest. Calculate how much you could save using Savvy’s weekly or fortnightly repayment calculator.
Some lenders allow you to ‘take your mortgage with you’ when you move house, which is known as loan portability. This can be a very useful additional feature because it means you don’t have to discharge your mortgage and re-apply for a loan if you want to move house; you just ‘port’ your loan from the first property to the second. You’ll just be charged a low administration fee, which is usually less than $250.