Home loans for the self employed

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on September 10, 2021
Home loans for the self employed

Many lenders have a different process when approving home loans for those who have their own businesses or are sole traders.

Operating as a sole trader in Australia makes up an estimated 8.2% of the Australian workforce (ABS). There are more than million Aussies who operate as a sole trader.

The small business represents the Aussie dream for so many, but its important to understand how this impacts you when it comes to owning a home. The main difference is how you demonstrate your taxable income.


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Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Lender

Variable
More details
UNLIMITED REDRAWSSPECIAL OFFER
  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
UNLIMITED REDRAWSSPECIAL OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
Variable
More details
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES
  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
Variable
More details
NSW/VIC/SA METRO & INNER REGIONAL AREAS
NSW/VIC/SA METRO & INNER REGIONAL AREAS

Variable Home Loan (Principal and Interest)

  • $5000 Cashback. T&Cs Apply.
Variable
More details
REFINANCE ONLY
  • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
REFINANCE ONLY

Variable Rate Home Loan – Refinance Only

  • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
Variable
More details
NO ONGOING FEESFREE REDRAW FACILITY
  • Rate Match Guarantee. Tic:Toc will match the rate on identical variable P&I home loans. T&C's Apply.
NO ONGOING FEESFREE REDRAW FACILITY

Live-in Variable Loan (Principal and Interest) (LVR < 90%)

  • Rate Match Guarantee. Tic:Toc will match the rate on identical variable P&I home loans. T&C's Apply.

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of June 25, 2022. View disclaimer.



What do lenders consider a 'Sole Trader'?

A sole trader means you have established a business and have an Australian Business Number (ABN) for which you are individually and legally responsible.

As a sole trader you are entitled to keep all profits after tax has been paid but liable for all losses.

Why are home loans different for sole traders?

Lenders are more specific in their requirements when dealing with business owners and sole traders. That’s because historically, these home owners have defaulted more often than pay as you go (PAYG) employees - those paid a regular salary.

Sole traders represent a higher risk because their income might not be as stable as a PAYG applicant.

To protect themselves from defaults, banks are traditionally tougher in their assessment and will often have higher interest rates or borrowing limits for sole traders/business owners.

How do lenders calculate your earnings?

  • Lenders assess a sole trader’s income differently than PAYG employees.
  • Lenders may asses any or all of the following to calculate your taxable income:
  • The income from the most recent tax year
  • The lower income from the last two tax years
  • The average income from the last two tax years

What will lenders ask for?

Different lenders have different requirements, however standard home loan approvals for sole traders will need:

  • The last two years of tax returns
  • Profit and loss statements from your business
  • Two years of Business Activity Statements (BAS)
  • Proof that your ABN has been registered for the past two years

Other key information that will assist you in accessing a home loan as a sole trader:

  • Bank account statements
  • Details of personal and or credit loans and debts
  • Existing investments (shares, term deposits)
  • Existing assets (such as a car)

How much can you borrow as a business owner?

Some lenders will allow you to borrow up to 95% of the property’s value if you provide two years' tax returns supplemented with notice of assessments (NOAs) and two years' Australian Business Number (ABN) statements.

Having these documents when applying means you could access more competitive rates.

If you can’t provide these documents, lenders will allow you to access 60-85%, depending on their individual requirements. This is known as a low doc home loan.

What if I only recently became a sole trader?

A low doc loan is an alternative for those seeking a home loan who haven’t had an established ABN as a sole trader for two years.

Different lenders will have different requirements, but some do offer low doc loans in unique circumstances.

Sole traders who have more than seven years' experience in their field may be eligible for a low doc loan even if they have only recently begun operating their own business.

Case Study:

Alfonso Letrader is a carpenter who has has recently established his own business in the past 12 months.

Because his ABN is less than two years old, and he does not have two years of taxable income for a lender to see, he is unable to gain approval for a traditional sole trader home loan.

However, Alfonso has been working as a carpenter for twelve years, completing his apprenticeship, and then working as a licensed carpenter for a large building company.

This experience can be factored in by lenders in order to approve a low doc loan.

See Also: Tradies prioritising home ownership over starting a business

Tips for finding a home loan as a sole trader

There are other strategies for sole traders to be as prepared as possible when applying for a home loan:

Separating work and life

As a sole trader, it is important to provide your lender with clear financial information. It need to be clear which expenses are business related, and which are personal.

Savings.com.au recommends chatting to a professional about making sure your personal and business finances are clearly separated.

Reduce debt

Personal debts, such as your credit card, can impact your borrowing power.

The lower your outstanding debts, combined with good credit history, will make it more likely your home loan is approved.

It’s imperative to show a lender you are capable of managing and covering your existing loans and debts.

It is important to know that for even the most experienced sole trader, each lender will have their own assessment when approving such a home loan. It’s important to seek financial advice when preparing to apply for a loan, and have your affairs in order before you put in your application.


Image by Fahmi Fakhrudi via Unsplash

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

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Aaron joined Savings.com.au in 2021. He is a finance journalist with a keen interest in property, the share market, and improving financial literacy in young Australians.

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