Freelancers can still get a good home loan deal!
It may seem unfair that banks treat you differently as soon as you leave your full time employment, particularly if you become a freelancer.
Most banks generally perceive freelancers as casual workers who don’t have stable employment.
However, not all lenders think this way!
How much can I borrow?
By meeting standard lending criteria and providing the necessary documents to prove your income, you can borrow up to:
- 90% of the property value: If you can prove that you have a strong income and have been paying all of your debts on time, you may be able to borrow 90% plus Lenders Mortgage Insurance (LMI). Lenders generally charge LMI when borrowing more than 80% of the property value.
- 95% of the property value: You’ll have to meet a stricter qualifying criteria if you want to borrow 95% of the property value. For a better chance of approval, you’ll need to have a clean credit history, strong income, reasonable asset position, minimal debts and 5% in genuine savings. Typically, banks consider genuine savings as savings accumulated or a term deposit you’ve held in a bank account for at least 3 months.
- 105% of the property value: With a guarantor home loan, you can borrow up to 105% of the property value unless you’re refinancing. When the loan drops down to 80% of the property value, you can apply to remove the guarantee. The guarantor will only have to pay if you can’t afford to repay the loan.
Why do banks have problems with freelancers?
As a freelancer, your income is lumpy and inconsistent because you’re paid based on results or on a per project basis.
As such, even though your income can be assessed using several different methods, you may have to meet stricter lending criteria.
This is because banks tend to consider your employment to be unstable even if you may be consistently working on high pay-off projects for a reputable company.
As a result, lenders often reduce your borrowing capacity.
Luckily, there are lenders that can accept your employment situation and offer better deals.
What do I need to provide?
Most freelancers are self employed. They work on a contractual basis and aren’t often committed to long term employment.
Lenders will need you to provide at least:
Your tax returns will help prove that your income is consistent and ongoing. This is why most lenders require freelancers to have been self employed for at least two to three years.
Complete our free online assessment form or call us on 1300 889 743 and speak with one of our credit specialists. We can help you understand and prepare all the documents you’ll need to get approval on a freelancer mortgage.
How to get home loan approval as a freelancer?
Getting your mortgage application as a freelancer approved depends on how the lender assesses your home loan application.
Australian lenders deal with self employed borrowers regularly so you’re more likely to get approval if you can qualify as one. This means you’ll need to have an Australian Business Number (ABN) and have completed your financials for at least two years.
Besides, without an ABN, you’ll be on a 49% tax rate! Although you’ll be the one charging the rates, 49% of that will be withheld and delivered to the Australian Taxation Office (ATO).
Also, if you’re earning over $75,000 a year, you’ll need to register for Goods and Services Tax (GST).
How can I increase my borrowing power?
Your borrowing power doesn’t only depend on your employment status. It also relies on your income, family size, location, current debts, loan type and the lender that you choose.
You may be able to borrow more by:
- Cancelling unused credit cards: Most lenders assume that your credit cards will be fully drawn to their limit even if they won’t. However, there are some lenders that will ignore any credit cards that have been paid off in full for three months in a row.
- Considering a fixed rate: Lenders usually add a buffer of around 1.5% on the Bank Standard Variable Rate (BSVR). If you apply for a three year fixed interest rate, it’s usually cheaper even if the lender may still include a buffer.
- Consolidating unsecured debts: Unsecured debts often have a higher interest rate. If you have any debts with short repayment terms and expensive monthly repayments, you can consolidate them. They will no longer show as other financial commitments when assessing your home loan application.
- Avoiding bad credit records: Bad credit record affects your overall home loan application. By avoiding even a single black mark on your credit file, you’ll have access to better deals and offers.
- Choosing the right lender: All lenders assess your borrowing power in their own personal way. They do so using different calculations that take your personal situation into account. You may not be able to borrow more than 80% with a lender while another can be willing to lend 90% plus LMI.
For more information, you can check out the things that can affect your borrowing power.
What if I have bad credit?
As long as you can meet certain requirements non-bank lenders can consider the following:
- Defaults, judgments or court writs.
- Discharged bankrupt or low credit rating.
- Freelancers on a Part IX agreement.
- Arrears on any existing mortgages.
However, it’s recommended that you apply for a mortgage only after your credit has cleared. You can browse through the bad credit home loans page if you want to learn more.
How to get around the tighter lending criteria for freelancers?
To get a better deal, most lenders will need you to have a bigger deposit, strong income and a perfect credit history. However, this may not be so easy for everyone.
Even if you prove that you can afford making mortgage repayments, you may still have to pay a slightly higher interest rate or need a larger deposit.
With a few tips and tricks, you can reduce your mortgage costs and save some money that you can stash away for a rainy day or use for investment purposes.
For example, you can use the First Home Owners Grant (FHOG) as your deposit although it may not be enough on its own. The FHOG is a one off grant payable to first home buyers that can meet certain qualifying criteria.
Using rent as genuine savings
Some lenders can accept a rental payment history as genuine savings.
Although you’ll still need a 5% deposit, it can come from any source including gift, inheritance or equity in another property.
In order to qualify, you’ll need to have been renting for at least three months with timely payments of your rent and bills.
Your rental repayments must also be at least half of the proposed home loan repayments.
If you don’t have genuine savings and you don’t think your rental history will be accepted, you can try for a no genuine savings loan.
Can I reduce the cost of my freelancer mortgage?
A simple way of reducing the cost of your mortgage is by reducing your LMI. For a $450,000 loan at 90% Loan to Value Ratio (LVR), you’ll have to pay up to $9,752 in LMI.
Although there are no LMI home loans, you may not qualify with most lenders because of your employment situation. There are other ways to reduce your LMI though.
The larger your loan size and amount, the higher will be your LMI. By adjusting the loan size and loan amount, you can potentially save thousands.
For example, you can easily save up to five thousand dollars or more by reducing your loan size from 90% to 85%.
Also note that different lenders and insurers have different LMI premiums. By choosing the cheapest LMI provider, you can essentially avoid a huge mortgage premium.
How do banks view freelancers?
The trend in doing freelance work is growing ever so steadily, particularly among Gen Ys and baby boomers.
With the number of freelancers and freelancing companies growing every year, bank regularly deal with a variety of freelancers.
This includes freelancers working in:
- Event management
- Tourism (tour guides)
- Translating, and more
Why should I speak with a mortgage broker?
Unlike many banks, we understand how freelancers work. Our mortgage brokers specialise in getting tough home loans approved and a freelancer mortgage is one of them.
With the knowledge of the lending policies of various banks as well as non-bank lenders, you can find out which lender is right for you and your loan needs.
Please contact us on 1300 889 743 or fill in our free online assessment form to speak with one of our mortgage brokers today.