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Recent research has highlighted the challenges small-business owners are facing in taking out a home loan.
As revealed in Great Southern Bank’s Smaller Small Business Research, 40 per cent of small-business owners believe being self-employed makes it more difficult to own a home.
A further 20 per cent said they are still saving for a house deposit.
There were a variety of reasons for these difficulties, with the main reason being inconsistent incomes.
Following were stricter lending criteria, “banks see me as too high risk”, paperwork requirements, cost of living, difficulties proving income, and taxation.
Self-employed borrowers are one of the fastest-growing borrower segments, said Wave Money founder and managing director John Flavell.
He recognises the self-employed as both a challenge and an opportunity but are still under-represented in lending.
“Self-employed borrowers’ earnings are often through complex structures and investments, and their personal and business finances are closely linked. Traditional lenders and many non-bank lenders struggle to deal with this complexity,” said Flavell.
“Traditional credit models score non-traditional income as high risk, even when the self-employed borrower is financially stable.”
Despite these challenges, home ownership for business owners is attainable, said Flavell. He said brokers are critical in this support by connecting borrowers with lenders that will account for complex and non-traditional pay structures.
“For brokers working with self-employed clients, partnering with the right lending partner that understands the realities of non-traditional income who has flexibility and discernment in their credit assessment model is critical,” he said.
“What is important for self-employed borrowers is the expertise of their broker together with a broker-lender relationship that brings a flexible and agile approach to these non-standard applications.
“Instead of relying on algorithms that dismiss non-standard applications, the lenders who take a more bespoke approach are the key to delivering positive outcomes for self-employed borrowers.”
For small-business owners, Great Southern Bank provided tips to help enter the housing market:
- Pay yourself first and regularly: A steady income stream signals stability. Paying yourself first across a regular pay cycle.
- Clean up debt, don’t add to it: Reduce personal debt before applying to boost your debt-to-income ratio.
- Organise your paperwork or have someone do it for you: While some lenders may require less, aim for having two years of tax returns (notice of assessments), business activity statements (BAS), and financial records at the ready. This is often where a good accountant plays a key role.
- Addbacks – the more financial detail, the better: Addbacks are expenses that can be added back into a self-employed applicant’s income for assessing serviceability of a mortgage. These are commonly found within tax returns or profit and loss statements and can be assessed according to the funder’s policies by an experienced lender or broker.
[Related: Over one-third of SME customers used a broker in the last 12 months]
