Mortgage Options for Self-Employed Kiwis
For many self-employed individuals, the dream of owning a home can seem elusive due to the unique challenges they face in securing a mortgage. However, with the right approach and understanding of available options, self-employed Kiwis can successfully navigate the home loan landscape. This article explores the mortgage options available to those who are self-employed, highlighting the steps to increase the likelihood of approval.
Understanding the Challenges
Self-employment offers the freedom to be your own boss, but it also comes with fluctuating income, which can complicate the mortgage approval process. Traditional lenders often require a stable income history, which can be challenging for those whose earnings vary from month to month. According to Statistics NZ, there are over 300,000 self-employed workers, and this number is growing. Despite the challenges, there are several pathways to securing a mortgage.
Traditional Bank Loans
Most banks require self-employed applicants to provide comprehensive financial documentation, typically covering the last two years. This includes:
- Two years of accountant-prepared financial statements: These documents demonstrate the profitability and stability of your business.
- Two years of IRD tax summaries: These summaries provide a clear picture of your taxable income, which banks use to assess your ability to repay the loan.
For those who have been self-employed for less than two years, obtaining a mortgage from a traditional bank can be more challenging. However, if you have a partner with a stable income or other sources of income, this can bolster your application.
Non-Bank Lenders
Non-bank lenders have become a popular option for self-employed individuals due to their flexible lending criteria. These lenders often offer:
- Low-doc loans: These require less documentation than traditional bank loans, making them more accessible for those with a shorter self-employment history.
- Faster approval processes: Non-bank lenders can often process applications more quickly than banks, which is beneficial in a competitive property market.
These lenders may accept alternative forms of income verification, such as six months of bank statements, and are generally more willing to consider the broader context of your financial situation.
Mortgage Brokers
Engaging a mortgage broker can be advantageous for self-employed individuals. Brokers have access to a wide range of lenders and can help you find the best mortgage product for your situation. They can also assist in preparing your application to ensure it meets lender requirements, increasing your chances of approval.
Tips for Improving Your Chances
- Maintain Accurate Financial Records: Use accounting software like Xero or MYOB to keep detailed records of your income and expenses. This will make it easier to provide the necessary documentation when applying for a mortgage.
- Optimise Your Tax Returns: While it might be tempting to minimise taxable income to reduce tax liability, showing higher income can improve your mortgage application. Work with your accountant to balance tax efficiency with mortgage application requirements.
- Build a Strong Deposit: A larger deposit can make you a more attractive borrower, especially if your income is variable. Aim for at least a 20% deposit to increase your options and potentially secure better interest rates.
- Consider a Co-Borrower: If possible, applying for a mortgage with a partner who has a stable income can strengthen your application. This can be particularly beneficial if your self-employment income is relatively new or fluctuating.
- Seek Professional Advice: Consult with a mortgage broker or financial advisor who specialises in self-employed mortgages. They can provide tailored advice and connect you with lenders who understand the self-employed market.
While securing a mortgage as a self-employed individual can be more complex, it is by no means impossible. By understanding the options available and taking proactive steps to prepare your financial documentation, you can increase your chances of obtaining a home loan. Whether you choose to work with a traditional bank, a non-bank lender, or through a mortgage broker, the key is to present a strong, well-documented case for your financial stability and ability to repay the loan.