Choosing the Right Loan While Self-Employed

If you’re self-employed and looking to get into the property market or purchase a new car, chances are there will be a few extra hurdles you have to jump before you can obtain finance. While it may not feel like it, there are options for finance, even for those who are self-employed. Before you take the first offer on the table, make sure you’ve done your research and that you’re choosing the right loan for your circumstances both now and in the future.

Finance for self-employed individuals

Applying for finance can be daunting at the best of times, but even more so when you’re self-employed. You may be in a situation where your income fluctuates or you may not have payslips to verify your income. In addition to this, as we’re still recovering from COVID-19 and the overall economic impact, banks are understandably wary and are considering their risks and lending provisions with greater scrutiny than ever before. It all sounds a bit doom and gloom, right? Well, it doesn’t have to be. While you may have to provide greater evidence and supporting documentation as a self-employed person, don’t let this deter you. Remember, there are all kinds of complex situations in which people find themselves that may require an extensive application process. Ultimately, a lender just wants to be certain you can afford to make your repayments if you obtain a mortgage. Inovayt Senior Mortgage Broker Melbourne, Justin Coughlin says it’s important to keep in mind that, “the way self-employed income is assessed varies greatly from lender to lender and therefore the outcome of an application can be drastically different depending on which lender it is submitted to. For this reason, an experienced broker who knows different lender policies is crucial to the success of an application.” With all of this in mind, there are some things you can do before you even see a broker to ensure you’re in the best possible financial position. We explore these below. 

How to get a loan while self-employed

Plan ahead

Typically, lenders ask for two completed years of business financials when you’re self-employed and you will need to demonstrate that you’ve had either an ABN or CAN for two years as well as being registered for GST for 12 months. Lenders want to see these documents, including your previous tax returns, as they are typically used as a guide for determining how much you earn. Make sure you know where your documents are so you can make them available with ease. If you’ve been self-employed for less than two years, or if your profit has significantly reduced in the past 12 months, lenders may see this as a concern. In this instance, it’s best to engage your mortgage broker to navigate these potential barriers. Justin says, “Preparation is key when it comes to finance applications for self-employed applicants. The amount of documentation required is greater than for other applicants so it’s very important to ensure all documents are available to ensure the application can progress smoothly.”

Speak with a mortgage broker

If you’re self-employed, you know that time is money. Researching options and putting together a quality application takes time – most likely time you do not have. A quick Google search on loans for self-employed people brings up countless options, many of which refer to low document loans. While these might be your best option, they typically do attract a higher interest rate so it’s worth having someone on your side, like a mortgage broker, who can undertake the research and determine the best available options for you. Your broker will also understand the varying lending criteria for each bank and will know which is most likely to provide you with finance and how to make your application as attractive as possible.

Understand your corporate structure

In our experience, a lot of small business owners don’t understand their corporate structure. Your corporate structure can play a significant role in accessing finance, particularly if there are additional owners or if you are part of a trust. In Australia, there are four main business ownership types: sole trader, company, partnership and trust. To keep things moving at a steady pace, we suggest you know what kind of corporate structure you have before you speak with your broker. If you’re unsure, your accountant should be able to assist. It’s also important to advise your accountant that you are trying to obtain finance. Justin states: “It can be tempting for self-employed applicants to work with their accountant to minimise the amount of profit that is declared in order to reduce tax liabilities. However, this can cause issues when it comes to applying for finance as it may appear there is not enough income available to make the repayments on a requested loan. It is important to be able to clearly show the profitability of your business to ensure your application has the best chance of being approved.”

Car loans for people who are self-employed

If you’re self-employed, there may come a time when you consider purchasing a new car. There are many different loan types when it comes to car finance including, novated lease and chattel mortgages. Before you apply for a car loan, you should consider whether you are applying on behalf of your business or as an individual. If you choose to apply as a business, the same guidelines listed above apply. In most cases, you will need to show two years’ worth of financials. Deciding which type of finance is best suited will depend on your circumstances. We suggest you discuss this with your broker as they’ll be able to explain all the options available in detail.

Home loans for people who are self-employed

If you’re applying for a home loan and you’re self-employed you must be prepared with detailed financial documents that outline your financials for the past two years. When determining your borrowing capacity, each bank’s lending criteria will vary. Your income may be assessed against:

• your lowest income figures for the past two years;
• your most recent income as stated on your tax return; or
• an average of your income over the past two years.

These figures, and the way they are assessed, can vary significantly which is why it can help to use a broker. They’ll be able to ascertain which lenders are most likely to consider your application and provide you with the best outcome. If you have experienced a business downturn as a result of COVID-19, you may also be asked to provide a statement that comments on this and addresses where the business stands currently.

Lenders also make mistakes when viewing self-employed income

Often, it comes down to a lack of understanding from the bank when it comes to your self-employed income. A bank will rarely take the time to work with your accountant to get a full understanding of your potentially complex structures. This can result in the bank not maximising the income they take into consideration when assessing your loan application. Inovayt’s combined 100 years+ of self-employed and business banking experience ensures that we don’t leave a single dollar unaccounted for and this can mean the difference between you achieving your financial goals. We always encourage people who are self-employed to speak with a broker 12 months before they plan to purchase a new home. This timeline means your broker will be able to sufficiently support you throughout the process and ensure you have all the documentation you need to support your self-employed home loan application. If you’re self-employed and planning to purchase a property soon, book a free meeting to discuss the next steps with a mortgage broker.