What Contractors and Self Employed Borrowers Need to Know

Borrowing money as a contractor for self employed person is not as straight forward as borrowing money when you are a PAYG employee.  In fact the levels of lending policy extremes when comparing PAYG and self employed or contractors is great.

At one extreme end, PAYG employees can seek to secure a Home loan with some lenders as early as getting their first payslip from starting a new job.  On the other end, some lenders require a minimum of 2 years full financials with full tax returns before they will consider self employed applicants as borrowers.

By showcasing the extremes, you get an understanding of the bias sometimes put  in place for contractors and self employed people and the reasons for this, whilst not looking fair, are that 4 out of 5 small businesses fail in the first 5 years. Lenders who lend money to these people have a higher risk in terms of them meeting the mortgage repayments, if in fact their businesses experience cashflow issues or a downturn in performance.  This is why lenders, generally speaking like to at least look at an extended period of financials – hence the 2 years for most.

In saying this, the benefit of working with a qualified and licensed mortgage broker is they have many lenders to choose from and not every lender will look at self employed in the same light.  There are a couple of lenders who will look at only 12 months financials.

And in terms of Contractors, well credit lending criteria for home loans also can take on a different form to those who are say directors of a company and self employed within their own entity.  There once again will be lenders who look at them cautiously and again want 2 years full financials, but there are some who are happy with evidence of the contractor’s contract.  In this case the lending application might be supported with additional information about the time spent within this industry or their qualification standards.

So the message here is, don’t think that you need to have 2 years financials as a contractor or self employed in order to get your loan approve. If the bank you are dealing with say no, then get in contact with an experience and qualified mortgage broker (like us).

Our other important message to those who are contractors or self employed is to ensure they understand that any lending assessment is going to be based on your net income or profits, and not necessarily on gross figures.  So potentially you are going to have two professional service providers, namely your accountant and your mortgage broker telling you differing stories.

Your accountant is paid to ensure you legally reduce your taxes as best possible, which has the effect of reducing your profit.

On the other hand you want to borrow money to say buy a home or an investment property, so you will need to demonstrate to your mortgage broker and the lender you choose to work with, that you can afford this loan and a reduced profit figures is always going to conflict with this goal.

So it’s important to understand this and inform your accountant of your future plans and to ensure your broker and accountant are on the same page and that your financials are all up to date for when the time comes to borrow.

We recommend as part of this planning process to meet with your mortgage broker to establish your current situation and financials to establish a plan and what might need to occur, instead of doing it the other way around and bring the broker into the conversation, when you have fallen in love with a property or are eager to buy an investment property.  This should ensure you avoid any disappointment.