There’s a lot to be said for working for yourself. Whether you’re a freelancer, contractor, or small business owner, striking out on your own offers a sense of opportunity that’s hard to find in salaried roles.
However, self-employment can make things tricky when it comes to borrowing money. It doesn’t necessarily mean that you won’t be able to get a mortgage, but it does mean that you should be prepared to think ‘outside the box’ when applying for a mortgage.
Here we cover why Banks are more hesitant to grant mortgages and loans to self-employed people and what you can do to maximise your chances of a successful application.
Why do Banks reject self-employed workers?
Financial stability is one of the most important factors mortgage lenders take into consideration when looking at Home Loan applications. Given that a mortgage involves borrowing hundreds of thousands of dollars, Banks need to be confident that you’re in a position to service that debt.
As an employee, it’s pretty straightforward to demonstrate your ability to make regular payments. Because you’re on a salary and probably receive the same amount of money each month – with a little variance for overtime, bonuses, and promotions – the Banks can get a clear picture of your income and lend accordingly.
If you’re self-employed however, your income can vary substantially from month to month as your business goes through slow periods and phases of growth. As a result, Banks are often more hesitant to lend to self-employed people because there’s less certainty as to whether you’ll be able to afford your mortgage repayments in the long term – particularly if you haven’t been trading for long or haven’t been keeping up with your financial records.
How to maximise your chances of a successful application
Explore your options
The best way to secure a Home Loan as a self-employed worker is to explore other lending options such as non-bank lenders.
A non-bank lender is an institution such as a credit union or building society, which provide Home Loans with much more flexible lending criteria than conventional Banks. While non-bank loans tend to have slightly higher interest rates than traditional Bank loans, they can be a great option for self-employed people who have been turned down by the Banks.
Further down the track, once your business has grown and you’ve proven your ability to make your mortgage repayments, you may be able to refinance your home loan with a bank and lock in a more competitive rate.
Establish a robust self-employment history
Maintaining comprehensive financial records is critical for helping mortgage lenders get better insight into your long-term income trends and ability to service a loan.
Most banks will want to see at least one or two years of full financial records before they’ll even consider a home loan application from a self-employed worker. This can be tricky if you’re in the start-up phase, as many companies don’t turn much of a profit during the first few years of business, which can reflect poorly on your loan application.
Clean up your credit hygiene
Your credit history can impact a mortgage lender’s decision to approve your home loan, so it’s a good idea to get your finances, in order to strengthen your application.
For example, paying off consumer debt like credit cards, car loans, personal loans and other lines of credit can go a long way toward increasing your attractiveness as a borrower and improving your overall credit score in the long run.
To check out more information on credit scores and how to get a copy of your credit record.
What is a ‘Lo Doc’ mortgage?
These are a great start to owning property when your Financial accounts either aren’t already prepared, or you have only been self-employed for a short term.
You will need a deposit of 20% of the purchase price and expect an interest rate of about 1% over the Bank rate.
However, the a ‘Lo Doc’ mortgage (https://ilender.co.nz/home-loans/non-bank-lending/no-proof-income/) gives the self-employed a great way of getting started with a mortgage and then we look to refinance you to a Bank as quickly as possible.
Talk to the Mortgage experts
As one of New Zealand’s leading independent mortgage brokers, we know how to navigate the challenges involved with securing a competitive Home Loan as a self-employed worker.
Drawing on our specialist expertise and extensive network of Bank and Non-Bank lenders, we’ll work with you every step of the way to help you get the right mortgage for your unique needs.
Contact us today on [email protected] or call 09 887 1250 to find out how we can help.