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Challenges for Self-Employed Australians in Securing Home Loans
Self-employed individuals in Australia are encountering increasing difficulties when applying for home loans, as current economic conditions exert additional pressure on their financial situations. A recent report highlights the crucial importance of accurately preparing tax returns, which can significantly influence loan approval outcomes.
The Experience of a Self-Employed Dentist
Frank Farrelly, a dentist with an eight-year-established practice in Darlinghurst, Sydney, shares his personal struggles. Despite being part of a dual-income household with his husband, a lawyer, they faced rejection when attempting to upgrade from their one-and-a-half-bedroom terrace home to a larger property suitable for their two young children.
Farrelly notes, “As someone who is self-employed, securing a mortgage is inherently more challenging because it relies on income over extended periods.” He elaborated on the financial strains in his business and the broader economy, stating that increased operational costs and rising staff wages limit their ability to raise prices and attract more clients.
Despite savings amounting to a substantial sum, the couple’s broker could only secure a home loan approval of $3 million, short of their hoped amount of $3.5 million by $500,000. This shortfall illustrates the perception of self-employed applicants as "riskier" under the prevailing lending conditions.
Insights from the Mortgage Sector
Data from Great Southern Bank reveals that 40% of small business owners believe obtaining a home loan is more challenging than for traditional employees. The barriers they encounter include variable income, strict lending guidelines, and the complexity of documentation required.
Marina Michael, a mortgage broker who assists self-employed clients, comments that lending standards vary across banks. Prior to the COVID-19 pandemic, lenders typically required two years of financial records, including tax returns and notices of assessment. However, some lenders, like Commonwealth Bank, have begun to relax these requirements for certain applicants by considering only their most recent financial year.
Michael points out that self-employed individuals are often regarded as higher-risk borrowers due to the higher failure rates of businesses in their early years. This adds significant pressure on those wanting to enter the property market, particularly as self-employment accounts for approximately 15.7% of the Australian workforce.
Tax Return and Financial Planning
Looking ahead, Michael emphasizes the critical role of this year’s tax return for self-employed individuals aspiring to purchase property within the next 18 months. She advises that they engage with both accountants and mortgage brokers to ensure their financials are accurately represented.
“Get this tax return right because it will be the basis for your applications for the next 12 to 18 months,” she cautioned, recommending that potential applicants prepare two years of strong financials to maximise their borrowing options.
For those experiencing hurdles with traditional documentation, low-documentation (low-doc) home loans are an alternative, whereby banks may accept recent Business Activity Statements (BAS) or business bank statements alongside an accountant’s declaration. However, applicants should be aware that these loans typically come with added interest rates ranging from 1% to 1.5% higher.
Michael also suggests being mindful of the business structure when applying, as banks may interpret financials differently for sole traders compared to company structures.
Conclusion
The landscape for self-employed Australians seeking home loans is increasingly complex and challenging. As economic conditions fluctuate, careful planning and timely preparation of financial documents will be vital for improving chances of approval. Engaging with knowledgeable professionals is recommended to navigate these turbulent waters effectively.
