I’m Self Employed – What are my mortgage options?
Next to the great Australian dream of owning your own home, probably the next big ‘wish for’ item for many Australians is the opportunity to be able to work for themselves.
For many Australians, the prospect of long hours, hard work and a bit of entrepreneurial get up and go, far outweighs the benefits of being a lifelong wage slave.
However, like many things in life, there is plenty of upside as well as downside, when you want to ‘go it alone’!
One of those ‘small’ disincentives, is the prospect of an income stream that is neither guaranteed and often is less than consistent. For 'start up' business owners in particular, the difficulties associated with getting a bank to look seriously at their mortgage loan application, often seem insurmountable.
Over the last decade however, a number of bank & non bank lenders offer various mortgage loan products that specifically suit the requirements of the self employed.
These mortgage products take into account many essential borrower requirements for start up or working capital requirements, capital purchases, tax obligations and other investment opportunities.
By reviewing some key issues for the self employed, we hope that you will learn and understand that for the Australian business owner, the prospect of not being able to secure mortgage finance simply due to your employment status has changed dramatically and for the better!
Can I get mortgage finance even if I have just started a new business?
The quick answer here is, that depends!
There are always a number of factors that lenders (including ‘non bank’ specialist lenders) consider when assessing a mortgage loan proposal from a self employed applicant. These factors take into account a number of credit tests or ‘filters’ that broadly cover:
- Your understanding and experience in the chosen business venture
- Your capacity to repay the mortgage (and other financial commitments)
- The security offered (Basically, the real estate being offered for security)
- Your credit history
- Purpose of the loan
- The equity available in the security property
- Whether you will declare your income or provide full financials
- Whether the funds will be used for business, investment or domestic reasons.
These are probably the basic filters or tests applied by most lenders, however unlike most banks, an element of flexibility in the credit process (loan assessment) can be applied, particularly when it relates to income verification and/or an adverse credit history.
Of course, this does not mean that anyone who simply registers an ABN can expect to get a mortgage. Prudent lending practices always take into account the whole story, not just a segment or two of your personal circumstances.
Australian lenders continue to monitor credit risk associated with business borrowers. Anecdotally, credit default with low document or no document loans remains satisfactory. Bad debt write offs in Australia have been relatively insignificant in comparison to the more aggressive and foolhardy lending practices that was the catalyst for the meltdown of the U.S. home loan market i.e. The Global Financial Crisis.
Should I expect to be charged a higher rate of interest?
The quick answer is, probably!
What it depends on is the ‘credit risk’ assessed by various lenders. If you compare the following two scenarios, ask yourself, would you lend the same amount of money to these two individuals at the same rate?
Client A:
- Wishes to borrow $400,000 to purchase a restaurant as a going concern.
- Is a discharged bankrupt. Discharged 3 years ago.
- Has never owned or managed a business before.
- Has 2 credit cards and a car loan.
- Is buying his home which is valued at $350,000 with a mortgage of $500,000.
Compared to...
Client B:
- Wishes to borrow $200,000 to purchase a restaurant as a going concern.
- Has a clean credit history – no bad credit.
- Has been employed as a Restaurant Manager and Chef for 10 years.
- Has 1 credit card and owns his car.
- Is buying his home which is valued at $600,000 with a mortgage of $120,000.
Of course there are many other factors that are taken into account when assessing credit risk, however based on the scenario above, even a layperson with no finance industry experience could easily identify that Client B would (and should) secure a mortgage loan at a better rate of interest than Client A.
Why?
Lenders can only be certain of the past. They cannot be certain of the future. Client A may have genuine reasons for the bankruptcy, but we also know that he doesn’t appear to have any experience in the restaurant trade.
If Client A was successful in securing his loan, it would be prudent of the lender to apportion a risk premium over and above a standard commercial rate of interest to take into account the range of known adverse credit issues and a lack of industry skills.
Conversely, even though Client B will not be able to demonstrate clearly what income will be generated from the restaurant under his management, by having a clear credit history, modest current debt commitments, solid levels of equity (ownership) of the proposed security offered as well as having 10 years of direct industry experience, enables a lender to assess the risk of default as substantially less than Client A.
There are always basic rules in mortgage lending in assessing ‘credit risk’.
Mainstream lenders tend to use credit scoring techniques which require basic credit assessment filters to be passed or scored. What this means is an answer to a check or ‘filter’ must be either black or white, No greys I’m afraid!
Specialist lenders can therefore assess risk on an individual basis. In fact, specialist lending is really a return to traditional lending practices; where more is understood about the client, security and purpose than a computer scored loan ever could.
What are Low Doc and No Doc mortgage loans?
Simply put, if you have no or limited 'financials', some lenders are prepared to offer some flexibility in assessing your mortgage loan application.
What this means is, you can either do one of two things:
Low Documentation Mortgage;
You simply declare to the broker & lender what your annual income is. Basically, a borrower declares their estimated income for the current (or last) financial year to the lender, who then uses that stated income as the benchmark to demonstrate your capacity to repay the mortgage. You will liklely be asked to provide supporting information such as BAS statements, Bank account statements &/or your Accountant to sign an income verification letter, but again this is dependent on a number of factors, products & lenders.
No Documentation Mortgage;
This type of loan was once offered to investors or business owners who are using the borrowed funds for non domestic purposes only. The loan to value ratio is generally reduced to 70% or less of the value of the security property (residential) and no income statement is provided, other than an affordability statement by the borrower. No doc loan providers are few & far between now, since the advent of the recently enacted Commonweath National Consumer Credit Protection Act and more particularly, provisions regarding prudential lending standards. No doc loans are simply not available for 'consumers' and specialist lenders must now be very cautious when offering 'asset lend only' products. AMF does not promote or recommend No doc styled loans, unless there is adequate supporting documentation available to cross reference income.
Low doc loans remain very popular with the Australian borrowing public, however a prudent stance must always be taken when securing any form of mortgage finance.
Low Document loans also have the propensity to be secured incorrectly and there is market evidence to suggest that some borrower incomes have been artificially inflated to cater for larger loans.
Also, don’t be tempted into borrowing more than you can reasonably expect to repay and what your true income can adequately service. Ensure that the purpose of your loan is clearly stated on your application and do not sign any document that has not been read and understood by you or that has been only partially completed.
Remember, the Australian Tax Office make spot reviews of clients and their brokers, particularly when there is some evidence of high incomes being stated on loan applications but income stated in tax returns is decidedly lower.
Be warned and seek appropriate advice.
However, for the right reasons and with prudent assessment, a low documentation loan has assisted many small business people over many years. These loans are also open to borrowers with adverse credit.
The impact of the GFC has created some difficulties with banks and most non bank lenders pricing. Low Doc loans have been impacted significantly by the 'credit squeeze' and as a result, not only has 'credit' requirements tightened, but lending interest rates have increased over and above the Australian Reserve Bank 'official cash rate' movements.
This has meant that in particular, non bank 'low doc loans have become comparatively more expensive than the 'Banks' offerings and as such, clients seeking this type of loan really do need to ensure that their credit histories and equity levels are sound, to ensure a reasonably 'competitive' rate of interest on their loans.
In any event, please call Assent Mortgage Finance on 1300 72 86 96 to discuss your options further.
A not so profitable business?
My business has made a loss this year. Can I still apply for a mortgage loan?
Maybe! So long as the rest of your credit criteria is satisfactory.
Bank as well as ‘Non bank’ lenders will identify the reasons for the loss, however if the ‘fundamentals’ of your business (and the industry that you operate in) are not sound; there is every chance that your mortgage application will not be successful.
Your financial statements should offer some insight (from a lenders perspective) into what ‘add backs’ and one off ‘extraordinary’ expenses/losses that may provide ‘offsets’ against your reported ‘loss’.
For this reason, it is strongly recommended to secure the advice of a competent Finance Broking professional to advise you on your options and to ascertain the preferable course of action.
Can I supply financials with my mortgage application if I have them?
Not only is it a it a commonsense approach, if you have full financials, you must provide them. Failing to provide financials when they are available and opting for a low doc declaration is not appropriate.
If your business is without financials because you’ve only been operating for 6 months or so, or you only have management accounts (e.g. MYOB statements) then obviously a mortgage loan submission without ‘financials’ will likely be the recommended approach, if your credit profile fits the credit requirements of a lenders product.
What if I’ve had some bad credit in the past?
Having a bad credit history in itself does not automatically exclude you from securing mortgage finance. The key elements behind any unsuccessful mortgage loan application (with a history of bad credit) can be best described as one that the applicant has:
- Hidden credit information from a proposed lender
- Hidden credit information from your mortgage broker
- Been untruthful in any way
- Have a history of credit avoidance
As mentioned earlier, a lender does not have the capacity to know what future events may unfold (if they did, every loan they funded would never default).
However, if confronted by a mortgage loan applicant with a poor or bad credit history and if they are prepared to honestly outline any relevant details asked of them, so long as a number of other credit criteria checks out satisfactorily, a good chance of a positive outcome may occur.
If however, an applicant lies or withholds information, this clearly demonstrates to the lender that the ‘character’ of the applicant is in question.
The clear message here is simple. If you have an adverse credit history, tell your Finance Broker the full story and he/she will give you a reasonable indication of whether the application will fulfil the lending criteria of a number of lenders.
Fail to do this and your mortgage application won’t get past first base.
Do I have to use my own home as security for a business loan?
If it’s the only property you have available for a lender to secure the loan against, then yes. If you have other ‘real’ property and it is seen as an acceptable security, then you may be able to use these properties as well.
Keep in mind that some rural properties, inner city apartments, and other specified properties may be unacceptable as a security to many banks.
There are also a number of Inventory & Cash Flow styled business financing products that don't necessarily require real property security. In many circumstances, personal guarantees and security over your business assets (i.e. Debenture charge) may be all that is required.
Call Assent Mortgage Finance now on 1300 72 86 96 to discuss your options.
Will I have to pay mortgage insurance?
Perhaps!
Some lenders require you to pay a mortgage insurance premium or its equivalent.
Mortgage insurance is usually paid by borrowers who are borrowing between 60% & 80% of the value of a residential property dependent on how you confirm your income. The idea is that the Insurance contract provides some protection to the lender, not you, in the event that if you default on your mortgage and the sale proceeds of your property are insufficient to clear any residual debt.
Some lenders expect borrowers to pay for this premium and others will price it into the loan, dependent on the 'Loan to Security Ratio'.
Depending on the ‘chosen’ lenders’ credit requirements and the nature of the product selected, will also determine if this is a requirement or not.
Again, call Assent Mortgage Finance for assistance.
Professional Advice
Of critical importance to most successful mortgage loan applications is the engagement of a qualified, licenced and professional Finance Broking service.
With the myriad of lenders and products now available, by simply applying to the first lender that comes to mind or that has been recommended by a friend or family member, could result in a less than suitable choice or worse, a declined mortgage loan application.
This is not only a waste of time and money, but the poor selection can detract from any future efforts you may make in endeavouring to secure mortgage finance in the future.
Assent Mortgage Finance are licenced and specialist Finance Brokers that can assist self employed applicants throughout the entire mortgage loan process.