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.
- What do lenders consider a 'sole trader'?
- Why are home loans different for sole traders?
- How do lenders calculate your earnings?
- What will lenders ask for?
- How much can you borrow?
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.
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.
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.
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.
Personal debts, such as your credit card, can impact your borrowing power.
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