Buying a home when you're self-employed

Whether you’re a small business owner, contractor, tradesperson or freelancer, it can be challenging trying to get a home loan when you’re self-employed. Yet Nathan McMullen, head of product and digital at RAMS, which specialises in helping self-employed borrowers realise their dreams of home ownership, says being self-employed needn’t hold you back.

Why are lenders more cautious?

McMullen says lenders generally require self-employed borrowers to jump through a few more hoops than PAYG employees. “Someone who’s self-employed can experience more income volatility than someone who gets a regular pay cheque every fortnight.”

“Another challenge for self-employed borrowers is that it can be more difficult for lenders to obtain a clearer picture of their earnings, versus PAYG employees, where everything is in black and white right there on the payslips and group certificate.”

Without PAYG documentation, McMullen says self-employed borrowers generally have three options:

1. Supply full financials

“This means providing the lender with your personal and business tax returns for the past two years,” he says.

While you do need to be organised and be up-to-date with your tax returns, the advantage of providing all these documents is that you could borrow up to 95 per cent of the property’s value. “Essentially, by providing all your financial documents, you give yourself the best possible chance of having your loan application approved.”

“Of course, if you borrow at more than 80 per cent loan to value ratio (LVR), you will still need to pay lenders mortgage insurance (LMI),” says McMullen.

2. Apply using your business activity statements (BAS)

McMullen says some lenders allow self-employed applicants to apply for a home loan by providing 12 months of BAS statements. “These provide a lender with an indication of the turnover within the business. Lenders will typically apply a ratio to that turnover as a way of gauging the income produced by the business that is then used to estimate how much you can borrow.”

3. Provide a Borrower Certificate of Income Declaration

A third option is to provide a form completed by your accountant, called a Borrower Certificate of Income Declaration. “This declaration is made by your accountant, based on his or her knowledge of your business and is a reasonable estimate of your annual income before tax, in line with previous financial years’ income levels.”

“A Borrower Certificate of Income Declaration is typically provided in cases where the applicant has a longstanding relationship with their accountant, but for whatever reason, tax returns have not been prepared and/or lodged.”

A disadvantage of applying for a loan using your BAS statements or a Borrower Certificate of Income Declaration is that you may only be able to borrow a maximum of 80 per cent of the property’s value. “This can be challenging for some borrowers, who may find it difficult to save the 20 per cent deposit as well as the other costs associated with buying a home,” he says.

What else to consider

McMullen says keeping good records is important for self-employed people looking to buy property. “If you want to enter the property market, or even buy your second or third property, it really does pay to be on top of your accounting and business financials, so that when it comes time to put in your loan application, you’re ready.”

“If you can build up a savings history over a period of at least six months, that can also work in your favour when applying for a home loan,” he says.

“Another recommendation is to consult a home loan expert and your accountant prior to applying for a home loan. That way you’ll have a rough idea of how much you can borrow and from whom, before you begin the process.”

Being self-employed need not be a barrier to home ownership. Even though you may need to provide more documentation than PAYG applicants, with a bit of forward planning you can successfully secure a home loan.