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What is a self-employed home loan?
A home loan for self-employed individuals and business owners is called a low documentation (low doc) home loan. It's an alternative mortgage option that doesn’t require the slew of documentation typical of a traditional home loan application, like payslips, tax returns, etc.
Self-employed home loans are generally offered by non-bank or specialist lenders and may sometimes be referred to as alt doc or non-conforming loans.
Low doc home loans are designed for self-employed individuals (who’ve been in business for at least two years) who can’t provide conventional proof of income.
Examples of self-employed borrowers include:
- Sole traders
- Any person(s) in a business partnership
- Business owners
- Tradespeople operating under an ABN
- Contractors & freelancers
- People who operate their business from home
Lenders perceive self-employed individuals as having ‘unpredictable’ income, which could lead to a higher risk of default. As a result, self-employed home loans come with a higher interest rate and may require a higher deposit — usually 20% of the property’s value — to reduce the loan-to-value ratio (LVR) to 80%. Some lenders may also charge additional fees, such as a risk fee.
Self-employed home loan requirements
Eligibility and documentation requirements vary significantly between self-employed mortgage lenders, but generally include:
Proof that your ABN has been registered for at least two years
An accountant's letter confirming your income or a self-signed income declaration
Business bank statements for the last three months
Business Activity Statements (BAS) for the last 12 months
Although self-employed mortgage applications require minimal documentation, you must still provide some proof of income with alternative documents, disclose your assets and debts, and undergo a full credit assessment (meaning you need a good credit score). Lenders will also assess the financial position of your business.
If you’ve been self-employed for less than a year, your options may be limited. That’s when working with a mortgage broker who specialises in self-employed home loans can help put your best foot forward.
Self-employed home loan vs standard home loan
| Self-employed home loan | Standard home loan |
|---|---|
You may only need to provide a self-signed declaration confirming you can afford the repayments & some bank statements | You’ll need full income documentation, including two recent payslips, bank statements for the last three months, tax returns, ATO notice of assessment, etc. |
Higher interest rates & additional ‘risk fee’ to mitigate the lender’s risk | Lower interest rates & standard fees apply |
You may need a 20% deposit of the property’s value | You can apply with a low deposit of between 5-10% of the property’s value |
Faster application process as there’s less paperwork required | Longer application process due to documentation processing |
How to compare self-employed home loans
Look at both the interest rate and the comparison rate
While the interest rate shows the interest you’ll pay as a percentage of your self-employed home loan, the comparison rate shows the overall cost of the loan — including interest and fees.
Compare loan features
Look for features that can help you save on interest and pay off your self-employed home loan faster, such as the option to make extra repayments and an offset account (the balance of that account offsets the amount owing on your mortgage and your interest). A redraw facility can be useful if you need to access extra repayments for emergencies or other expenses.
Watch out for loan fees
In addition to standard establishment, ongoing, and exit fees, lenders may also charge a one-off risk fee or ‘protection’ fee to offset the risk of lending to non-conforming borrowers. Ask your lender for a summary of the loan fees before you decide on a product. The fewer the fees, the cheaper the loan.
Check out the minimum deposit required
Some low doc lenders will require a deposit of at least 20% of the property’s value to offset the risk of lending to self-employed individuals. However, lenders like Pepper Money will accept a 5-10% deposit depending on the property and area you’re buying in, or if you have a guarantor.
Can you refinance a self-employed home loan?
Yes, you can initially take out a self-employed home loan to get into the property market and later refinance to a full doc home loan (with a lower interest rate) when you can provide the required income documentation. You can refinance to a new lender or stay with your current lender.
How to apply for a self-employed home loan
Applying for a self-employed home loan is similar to applying for a regular mortgage as a salary-earner.
1
Work with a mortgage broker who specialises in self-employed home loans as they can help find the best mortgage options for you specifically.
2
Once your broker assesses your financial situation and business position, they can pre-screen lenders that provide appropriate mortgage products.
3
Your mortgage broker will apply for the self-employed home loan on your behalf and handle the entire process until settlement.
4
You’ll be asked to send all your documents and personal information at once to streamline the process.
5
The low doc lender will verify your income and business information and conduct a credit check.
6
If you meet the lending requirements, you could be pre-approved for a self-employed home loan until you sign a contract of sale for a property and a property valuation is completed.
7
Once all due diligence is done, you may be unconditionally approved for a self-employed mortgage.
Self-employed mortgage lenders in Australia
Here are some of the main self-employed mortgage lenders in Australia:
- Bluestone
- Commonwealth bank
- Liberty
- Pepper Money
- RAMS
- RedZed
- Resimac
- Westpac
- Yard