SELF EMPLOYED LOANS
Being self-employed is hard enough at the best of times, let alone, when you’re under the impression that a bank will penalise you with a higher interest rate purely because you work for yourself! Luckily, the idea that you pay a higher interest rate on a home loan because you’re self-employed is just a myth. However, being self-employed can affect your ability to get a home loan.
Let’s say you’re a director of your own company, and you’re pretty good at what you do. You’ve got a couple of company credit cards, you’ve got a work vehicle with a loan against it, and you pay yourself an $80,000 wage after all your expenses have been paid for, with a little bit of profit left at the end of the year. How does a bank assess this? Do they just assume that you make $80,000 a year? In most cases, no, it’s unfortunately not that simple.
Banks want to make sure that you can repay a home loan under the worst possible circumstances. It’s partly to ensure that you don’t get yourself in financial strife, and partly to make sure that they get paid for the loan they’ve given you. Under the worst circumstances, those 2 company cards you have? Maxed out. That vehicle loan that you have with a 4.5% interest rate and that has a 30% balloon payment on it? It’s now a 7.5% rate and there’s no balloon.
Your credit card repayments, in the eyes of the bank, have just jumped from a measly $100/month, to at least $380 if you’ve got a total limit of $10,000. Those car loans? In reality, you only pay $550/month, but in the eyes of the bank, they want to see if you can still afford to pay them at $950/month.
Add to this the home loan itself. Most banks will want to check that you can still afford the loan if interest rates were to rise up to 7.5-8%, rather than the roughly 4% that they are now.
The income itself is also scrutinised. If you made $50K last year and $80K this year, lenders will arrive at different figures for what they consider to be steady income. Some lenders will look at your last 2 years income and take 20% on top of the lesser year ($60,000), some will average out the 2 years ($65,000), and some will just look at your most recent year ($80,000)
All these things combined, mean that while a bank won’t charge you more just for being self-employed, it can affect your ability to get a loan.
However, it’s not all bad news. A good broker will be able to look at your business, your goals, and your overall financial situation, and provide you with options for which lenders are most suitable for your situation. Different lenders have different policies and ways of looking at things, and a good broker will know exactly how every lender assesses debts and income, and will be able to find a home for your application accordingly.
If you’re self-employed and want to see what options are available to you for a home loan - Get in touch!