Getting a home loan as a sole trader in Australia

Working for yourself can be a dream for many, with flexible hours and the potential to earn more than you would in a standard 9 to 5 job.

However, one of the downsides emerges when it’s time to apply for a home loan. Salaried employees have it much easier when it comes to proving their income with payslips. For sole traders, irregular payments can be a bit of a hurdle.

Luckily there are home loan products and lenders geared towards helping self-employed people realise their property goals.

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Yes, you can apply for a home loan as a sole trader, but lenders may apply stricter criteria to assess your financial situation. Before approving a mortgage application, lenders want to ensure you can afford the loan and repay it. However, unlike salaried employees, who can provide regular payslips for income verification, sole traders often have variable incomes, which lenders may see as a higher risk.

In general, the more risk a lender perceives, the more conditions they might impose, such as a higher deposit. This can also mean additional documentation to verify your financial standing, such as the duration of your self-employment and the performance of your business.

If you think you might not fit the eligibility criteria for a standard home loan, some lenders offer products tailored for self-employed borrowers. These loans accept alternative financial documentation, like business tax returns, BAS statements, and ABN history, offering more flexible options than traditional loans.

If you’re a sole trader, the legal responsibility for all aspects of your business lies solely with you, including losses and debts. In this scenario, lenders may offer you a specialised home loan known as a low documentation loan, also called a low doc loan. Since you can’t provide salary slips to verify your income, it is possible to apply for this loan using alternative means of documentation, such as:

• Proof of your Australian Business Number (ABN) and GST registration, if applicable
• Notice of assessment and tax returns for the last two years
• Business transaction account statements
• The latest 12 months of Business Activity Statements (BAS). Some lenders might accept six months BAS if you can demonstrate strong financials
• An accountant’s letter supporting your income claim

If you’re unable to provide all these documents, some lenders may agree to consider your application if you can at least provide tax returns for the last two years or your recent profit and loss statements.

Sole traders who started their business less than two years back and don’t have tax returns to prove their income are unfortunately viewed as too much of a financial risk by most lenders. However, if you’ve been working in the same industry for many years before starting your business, some lenders may be willing to consider your income from your previous job and accept that you can afford the home loan. This is often done on a case-by-case basis.

For instance, say you’re a sole trader, operating a plumbing business for less than two years, but you’ve got experience of working in the industry for over seven years. In such a scenario, some lenders may consider your combined experience and work history as enough evidence to approve your application for a sole trader home loan. You may have to prove you’re less of a liability another way though, such as having a large deposit or spouse supporting your application.

The amount you can borrow varies from lender to lender and also your individual circumstances. If you’ve been self-employed for less than two years, lenders are likely to consider you a higher risk and offer you a lower percentage of the property price as a loan. On the other hand, if you can provide two years of tax returns with notice of assessments, you may be able to borrow up to 80% of the property price or even more if you agree to pay for Lenders Mortgage Insurance (LMI).

The important thing to know is that there’s no fixed way in which every lender is going to treat your home loan application as a sole trader. Some lenders are quite strict when it comes to self-employed borrowers, while others may be more lenient.

By understanding the eligibility criteria of various lenders, you can increase your chances of approval and even land a better deal by selecting a lender who’s more likely to treat your mortgage application favourably. The services of a mortgage broker could also prove to be helpful if you’re looking for a sole trader home loan, especially when you’ve less than two years of experience in the field.

Even though low doc loans are similar in structure to traditional home loans, the absence of standard documentation to prove the borrower’s income makes these loans riskier for lenders. To offset this risk, lenders often apply tighter eligibility requirements or additional fees.

Self-employed borrowers like sole traders who lack ongoing payslips may find it easier to apply for low doc loans with alternative documents.

Pros:

• Alternative documentation for self-employed borrowers: Low doc loans offer a practical solution for self-employed individuals, like sole traders, who may not have conventional income verification documents, such as payslips. Instead, they can use alternate documents like bank statements, BAS, and an accountant’s letter.
• Flexibility in income verification: Low doc loans generally allow a broader range of financial documentation, making it easier for individuals with variable incomes to apply for financing.

Cons:

• Larger deposit requirement: While a standard home loan often requires a 20% deposit, with a low doc loan, you may need to provide more than 20%.
• Higher interest rates: Interest rates on low doc loans are usually higher than traditional home loans. This rate difference can vary depending on the lender and the supporting documents you provide.
• LMI: LMI usually applies if you’re borrowing more than 80% of the property value with a standard loan. But with a low doc loan, LMI may come into play if you're borrowing more than 60% of the property value.

Even though a low doc home loan is likely to cost you more than a traditional home loan, it’s possible to find a good deal if you can make your application stronger with a good credit score and strong financials for your business.

A knowledgeable mortgage broker can help you compare deals from various lenders to find suitable home loan options and even negotiate with a lender to help you get a better deal. They can also help you with the application process, including keeping track of the paperwork, which could be useful when you don’t have the standard home loan documentation available as a self-employed borrower.