Obtaining a home loan as a self-employed individual

Who qualifies as self-employed?

A borrower is considered self-employed when their income, which is used to repay the loan, comes from their own business rather than from an employer. Self-employed applicants may include sole traders, business partners, or individuals who earn income through a company or trust in which they hold a share or unit. Borrowers working as PAYG employees for a company they own more than 25% of are also classified as self-employed by lenders. Self-employment structures can range from basic setups, such as a sole trader, to more complex arrangements involving multiple companies and trusts.

Challenges faced by self-employed applicants when applying for a home loan

Self-employed individuals face the following key challenges:

• Documenting income

Self-employed borrowers must provide different documentation compared to PAYG employees. This includes tax returns, Notice of Assessments, Business Activity Statements (BAS), bank statements, accountant letters, and income declarations. In some cases, self-employed applicants may not have all necessary documentation readily available when applying for a loan.

• Income calculation

Determining a self-employed borrower’s income for loan approval can be more complex. In cases of intricate business structures, even bank credit assessors may find it difficult to assess the income available for loan purposes. If this process is not handled correctly, it may prevent the applicant from securing the required loan.

• Tax minimization

Self-employed individuals often manage their taxes to minimize their liabilities, which can result in a lower reported income. This can affect the loan amount a lender is willing to offer. However, certain business expenses like interest, depreciation, and one-off expenses can be added back to taxable income. Self-employed borrowers may also distribute income to family members via a trust, and if this is not properly presented to the lender, it may not be counted as part of their income.

• Retained earnings

Income from retained earnings within the self-employed individual’s company is typically excluded when assessing their ability to repay the loan. Lenders usually consider only income earned during the current period.

• Retained company profits

Some lenders do not consider profits retained within a self-employed applicant's business as income for loan assessment purposes.

• Company borrowings

Loans taken by the business may be treated differently by lenders. Some lenders may include these loans as liabilities for the individual, even though they are repaid by the business, potentially reducing the borrower’s borrowing capacity.

• Division 7A loans

Lenders handle Division 7A loans differently. Some consider them during the servicing assessment, while others may exclude them. Some lenders may not approve loans for applicants with ongoing Division 7A loans.

• Australian Tax Office (ATO) debt

Many lenders will not approve loans for self-employed applicants with current ATO debt or those with an outstanding ATO debt under a payment arrangement. Some lenders may allow applicants with ATO debt to proceed if the debt is paid off with loan proceeds, or if the applicant can demonstrate the ability to manage this debt alongside the new loan and other financial commitments.

• Variation in lender policies

Lenders have different policies for assessing the income of self-employed borrowers and varying documentation requirements. Interest rates, fees, and charges also differ greatly, making it challenging for self-employed borrowers to find the most suitable loan without assistance from an experienced broker.

What is a low doc home loan?

A low doc home loan is designed for self-employed borrowers who are not required to submit standard documents such as tax returns and Notice of Assessments to verify their income. Instead, alternative documents such as Business Activity Statements (BAS), bank statements, accountant letters, and income declarations may be used to support the borrower’s income. Low doc loans often come with limitations on loan-to-value ratios (LVR), maximum loan amounts, and higher interest rates, fees, and charges. A range of lenders provide low doc home loans for self-employed individuals, and these products can vary significantly in terms of documentation requirements, interest rates, and fees. Low doc loans are commonly used as an interim solution until the borrower can update their financial documents and qualify for a full doc home loan, which typically offers lower rates and fees.