Sole Trader Home Loan
Being a sole trader gives you the chance to work more flexible hours and earn a higher income than if you were to do the same job working for someone else.
The problem is that when it comes to getting a home loan, many banks just don’t understand how sole traders make a living.
Some banks have a long list of lending requirements for approving a sole trader home loan such as asking you to provide tax returns, notice of assessments, accountant’s letter and other types of evidence just to prove your income.
Luckily, not all banks are the same! Read on to find out how you may qualify for sole trader home loan.
How do I qualify?
Most banks don’t understand the financial situation of sole traders and how they earn their income.
Luckily, not all banks are the same and won’t require you to provide documents like profit and loss statements or an accountant’s declaration.
Some of our lenders only require your last two years’ tax returns to qualify for a sole trader mortgage. The only reason they may ask you for more financial evidence, like recent profit and loss statements, is if your latest tax return is more than 6 months old.
You’ll still need to meet standard lending requirements regarding your income and credit history but if you can provide these documents, give us a call on 1300 889 743 or fill in our free assessment form.
What if I’ve been a sole trader for less than two years?
If you’ve been a sole trader for less than a year then, unfortunately, most banks won’t lend to you because you don’t yet have the tax returns to prove your income. To the banks, there is simply too much financial uncertainty with your new business venture.
However, if you’ve been working in the same line of work for some time, one of our lenders can look at your income from your last job and take that as proof that you can afford the home loan.
For example, let’s say you’re a sole trader and you’ve been operating your plumbing business for less than two years but you’ve actually been working in the industry for the past 7 years. In this case, there are some lenders who will take a common sense approach and accept this as as sufficient work history to qualify for a sole trader home loan.
What if I can’t provide my financials?
If you’re behind on your tax or can’t provide other financials, there are low doc home loan solutions offered by several major banks as well as non-conforming lenders.
You may be able to get a sole trader home loan via a low doc option but you’ll still need to provide at least one of the following:
- Your latest 12 months Business Activity Statements (BAS). Some lenders will accept 6 months BAS if your situation is strong.
- 12 months business transaction account statements.
- An accountant’s declaration letter confirming your income.
It is recommended that you try to go for a full documentation loan because with a low doc option, there are a few drawbacks, such as:
- A higher interest rate: This will vary from lender to lender and what sort of verification or supporting documents that you’re able to provide.
- A larger deposit requirement: With a typical home loan, you’ll need around 5-10% of the purchase price, but with a low doc loan you may need as much as 20%.
- A higher Lenders Mortgage Insurance (LMI) premium: LMI is an insurance premium charged by the bank when you borrow 80% or more of the property value. With a low doc loan, however, mortgage insurance is usually applicable if you’re borrowing more than 60% of the property value.
This is why it’s usually beneficial for you if you provide all of the financial documents and income evidence that you possibly have on hand. You may qualify for a full doc loan and you may not realise it yet.
On top of that, it’ll put you in a better position to borrow more and qualify for a sharper interest rate.
How much can I borrow with a sole trader home loan?
- Borrow up to 95% of the property value: If you can provide 2 years tax returns supplemented with notice of assessments (NOAs) and 2 years Australian Business Number (ABN) statements, and you can meet all other standard serviceability requirements, we can lodge your application as a full doc loan with a major bank meaning you can borrow more at a competitive interest rate.
- Borrow up to 60-85% of the property value: Major banks will only allow you to borrow up to 60% of the property value if you can only provide an accountant’s letter but some specialist or non-conforming lenders will allow you to borrow up to 85%, depending upon the strength of your application.
How do lenders calculate my income?
Most lenders look at your past tax returns in order to predict how stable your business will be in the future. The thing is, each lender calculates your income using different methods.
Some lenders may:
- Use the lower of the income reported on your tax returns for the past two years.
- Use your most recent year’s income.
- Use the average your past two years income
- Take 120% of the lowest year’s income
- Add back expenses such as depreciation into their calculation of your income.
- Only accept 50% of income protection payments but some of our lenders can use 100%.
Since every lender will interpret your tax returns in a different way, it can make a big difference to your chances of getting approved for a sole trader home loan.
Apart from your tax returns, lenders may also look at your skills and experience as well as the risk profile of the industry you work in to determine how to assess your income.
If your income has changed significantly (increased or decreased) over the last two years, you’ll need to provide a good reason backed up by strong evidence for this. Lenders want to make sure that the reason for the change was a one off and is not a reflection of your regular income.
Do lenders charge a high interest rate?
No! You can get the same low interest rates as a pay as you go (PAYG) applicant if we’re able to get you approved as full doc borrower.
Even if you do get a low doc home loan, we can help you convince your lender to reduce your interest rate back to a standard rate if you’re able to make your mortgage repayments in full and on time for a period of 2 years.
Why are lenders conservative when it comes to sole traders?
Lenders hold the view that sole traders represent a higher risk because their income is not as stable as a PAYG applicant. This is because banks have seen higher levels of defaults over the years from business owners like sole traders.
To protect themselves from defaults, banks are essentially a lot tougher in their assessment and will do things like charge a higher interest and/or restrict the amount you can borrow.
Fortunately, we know that there are literally hundreds of thousands of sole traders in Australia that have been trading profitably for years and we know which lenders readily accept sole trader home loan applications.
Give us a call on 1300 889 743 or fill in our free assessment form and we can help you find a suitable lender.
Good news if your business involves contract work
If you’re a sole trader and the majority of your business involves contract or subcontractor work, some lenders may consider you to be an employee which means mean you’ll be in a better position to get approved for a home loan with a wider variety lenders.
You may also be able to get a really competitive interest rate.
Can I take out a business loan?
Yes, sole traders may qualify for a business loan but the interest rates for a commercial loan tend to be higher than the interest rates for a home loan.
If you’re buying a residential property for a business then you can avoid these higher costs by choosing a lender that doesn’t refer you to their business banking department.
For more information on sole trader business loans, please contact us on 1300 889 743 or fill in our free assessment form.
Speak to a sole trader home loan specialist
If you’re a sole trader and looking to get a home loan, selecting the right lender is key.
Please keep in mind that it is best to apply for a home loan or business loan when your income is stable.
Give us a call on 1300 889 743 or fill in our free assessment form and we’ll help you assess your situation and find a lender that can provide the right sole trader home loan for your needs.
Not a sole trader?
We help people in all types of employment situations that are little “outside the box” such as business owners and contractors. Get in touch with us and discover how we can help you!