Help! I'm self-employed and can't get a mortgage. All too often self-employed people go to their bank to borrow on the house, are turned down, and think that's it, they can't get a mortgage. Ever.
The reality is that if they'd known the tricks of the trade they might well have been approved by the bank in the first place or at least by a second-tier lender. Thousands of self-employed people get mortgages every year.
It's not that banks specifically dislike self-employed people. It's just that the self-employed often have good accountants who can make their income vanish miraculously -- albeit legally. That's great when it comes to paying the taxman. But not when you need to prove income to get a mortgage.
Stuart Wills, of Mortgage Link West, says self-employed people's banks often look only at their net profit and decline the loan. A mortgage broker, however, can add back in genuine cash expenses such as home office costs and sometimes depreciation, which increases the borrower's income on paper.
In this case the self-employed person may be able to borrow at standard bank rates.
When banks run the numbers on a self-employed person they typically look at the average of the past two years' income, says Wills. If the self-employed person had a bad year financially in one of those two years, it can be problematic.
That's not the only problem. Self-employed people sometimes borrow against the house for business capital. When one of Wills' clients tried to do this recently Westpac wanted to charge him a commercial rate of 9 per cent interest. Wills took the application to the ASB, which lent at standard residential rates of 4.6 per cent. "That's a huge saving on a $1 million mortgage."
Quite often, self-employed people can demonstrate cash flow, but they can't prove their taxable income, says Wills. In that case he will usually suggest a "lo doc" loan from non-bank lenders, such as Avanti Finance, Liberty Financial or Resimac Home Loans.
Lo doc borrowers pay a higher interest rate, which could be around 7 per cent. Interest rates do vary at these non-bank lenders and there are different rates for borrowers depending on their circumstances. A matrix is applied to determine the interest rate. If, for example, you have two years of sound financials and a clean credit record, the interest rate will not be much higher than the floating rate offered by banks. If you have a bankruptcy behind you and your business is brand new, then expect a higher interest rate.
Even people with no income can get what's called "no doc" mortgages, where they simply certify that they can afford to pay the mortgage. A decade ago, it was relatively easy to get no doc mortgages. Since the credit crunch and more recently the launch of the Government's Responsible Lending Code banks and lenders have been more careful about this style of loan.
Wills arranged a no doc loan recently with Basecorp Finance. The borrower had no income at all, but was about to start earning. The mortgage cost her 10.5 per cent interest. But the plan was to refinance her with a bank in three to six months.
It would have been possible to get a 7 per cent interest rate with another finance company. However, the upfront fees with Basecorp were lower than some of its competitors, which meant she would pay less in the three to six months.
Even if you can't borrow immediately, a mortgage broker can give you tips on how to make your case more attractive in the future. That may be accumulating a slightly larger deposit or proving earnings over a longer period to qualify.
Or you might consider registering your business for GST. Many lenders like to see GST returns as it gives them a good idea what self-employed people really earn. The IR4 or IR3 return might have been massaged by a clever accountant.
Sometimes couples, where one member of the couple is self-employed, struggle to get a mortgage. In that case, it may be possible to take out a loan based on one salary alone, or present the loan in a way that is more appealing to a mainstream lender.
Finally, Wills says self-employed business owners who are paying credit card, commercial loan or HP interest for business purposes should consider approaching a mortgage broker to see if those loans could be transferred to a mortgage at a much lower interest rate. "They might have bought some plant for their business for $40,000 or $50,000 at 14 to 17 per cent interest over five years. If they could have that at 7 per cent over 10 years it eases the pressure on the business," he says.
• There are ways and means of presenting self-employed income
• A mortgage broker can help sell your case
• If a bank won't lend, a non-bank lender might
• Beware of banks charging at commercial rates