Contractors are paid in different ways. Understanding your income type will help you narrow down your loan options. Specifically, you need to determine whether a lender will consider your income as a PAYG (Pay-As-You-Go) employee or a self-employed contractor.
PAYG Contractors
PAYG contractors take up jobs for a fixed term with one primary employer. They receive regular payslips, on a monthly or fortnightly basis. PAYG contractors also receive benefits like sick leave and holidays, automatic tax withholding and contributions to super from the employer during the term of their employment.
If you’re applying as a PAYG contractor, lenders will review your salary by looking at your financial history for the past few years. Some lenders may also include overtime pay in your assessable income if you do shift work and receive overtime payments regularly.
Self-Employed Contractors
Self-employed contractors work as sole traders and may work with multiple clients. They don’t receive any leave benefits, a regular salary or payslips. They must have an ABN (Australian Business Number) to invoice their clients to get paid.
Besides the two broad categories of self-employed and PAYG contractors, there are lots of subcategories of contractors, including:
IT Contractor or IT Consultant
IT contractors are some of the best-paid workers across the country due to high employer demand and low risk. Yet, many lenders don’t understand the nature of the industry and decline their home loan applications. If you’re an IT contractor, be diligent enough to pick the right lender before applying for a home loan to reduce your chances of rejection.
Mining Contractors
Mining contractors are highly paid individuals, but often work on short-term contracts. This can be a challenge for mortgage approval, but some lenders follow a practical approach while analysing your application. Such lenders understand that mining contracts are quickly replaced, if not renewed, without impacting your repayment potential, which increases your chances of approval considerably.
Journalist or Freelance
Contractors working as journalists or freelancers are paid on a per-work basis, like an individual article or project. If you work as a freelancer, you would typically need to provide your tax returns for the past two years to substantiate your income for your home loan application.
Subcontractor
Subcontractors are a unique category of contractors. They can be employed on either a PAYG or self-employed contractor basis. Subcontractors are very common in industries like IT, construction, and mining, where they are externally commissioned, often with lucrative pay-outs. If you are applying for home loans for subcontractors, it will help to establish your income type first, to determine the home loan options available for you.
Once your income is established as PAYG or self-employed, your lender will balance your income with your expenses to calculate your liabilities. Your liabilities will include your monthly bills, credit cards and cost of living estimated by the lender. The total of your regular expenses, as calculated by the lender, is subtracted from your income to see if you have enough to make regular repayments on your home loan. If you plan to apply for a home loan soon, it is a good idea to control frivolous spending. This will add to your savings and increase your credibility as a borrower by increasing the cash at your disposal each month for making future repayments.