You might ask why self employed mortgages are discussed as being different from the normal home loans, but you might also find that getting a mortgage when you’re self-employed in New Zealand can be difficult too.
The financial landscape is littered with roadblocks, from irregular income streams to hefty documentation requirements.
Yet, for many self employed freelancers, contractors, and small business owners, owning a home remains a dream worth pursuing.
The key is understanding the unique challenges that the banks and lenders have with self employed mortgages, and then learning how to navigate them effectively. With the right mortgage adviser to support you, and with all the information available together you can create a strategic approach to getting a mortgage and therefore that dream of owning a home can become a reality.
Ever wondered why getting a home loan feels like jumping through hoops when you’re self-employed?
In this article we explore the reasons and present some of the popular options.
Key Takeaways
- Self-employed individuals face unique challenges in securing a mortgage due to income verification difficulties and documentation requirements
- Various mortgage options exist, including bank, non-bank, low-doc, and no-doc loans, each with its own set of pros and cons
- Maintaining organised financial records and seeking expert advice can significantly ease the mortgage application process
- Larger deposits can open up more mortgage options for self-employed borrowers
- Mortgage brokers familiar with self-employed situations can provide invaluable assistance
We cannot stress enough the importance of creating a strategic approach to getting a mortgage.
Why Securing a Home Loan as a Self-Employed Borrower is Different
Securing a home loan as a self-employed individual can prove to be a complex task.
Unlike salaried employees who have a steady monthly income, self-employed borrowers often face hurdles in proving their financial stability. The main challenge lies in meeting the stringent income verification requirements set by bank lenders. The banks will typically demand extensive financial documentation to assess your financial position, which can include 2-years of business financials prepared by an accountant plus copies of your tax returns as submitted to the Inland Revenue (IRD).
This can be a cumbersome and often impossible process for self employed people.
As mentioned, for most bank lenders, proof of income involves providing at least two years of financial statements prepared by an accountant. These documents, along with tax returns, are crucial to show consistent earnings over time. Unfortunately, the fluctuating nature of business income can make it difficult to present a stable financial picture. As a contractor, freelancer, or small business owner it’s crucial to demonstrate that your business is not only surviving but thriving.
Income fluctuation isn’t the only hurdle – business debt and overdue tax debt can further complicate the mortgage application process. Lenders scrutinise your financial statements and bank statements to evaluate your capacity to handle additional debt.
Any existing business debts can significantly impact the amount you’re eligible to borrow, and banks deem any overdue tax debts as bad account conduct. They think that running a business should be easy and that includes managing the cash for the business so everything is paid on time. Most people that are self employed or run a small business know that this can be difficult at times and especially with new businesses.
To improve your chances of getting a mortgage you could work on paying down debts and maintaining a healthy cash flow, but if you want a mortgage now then that might not be possible.
Utilising accounting software like Xero, MYOB or Hnry can help keep your financial records organised and up-to-date. This not only aids in the mortgage application process but also gives you a clearer picture of your financial health. By tracking your income and expenses diligently, you can provide more accurate proof of income, which is a critical factor in securing self-employed mortgages.
To improve cashflow some self employed will get business loans or invoice (debtor) finance which can help, but any of these loans needs to be included when assessing an application. The invoice (debtor) finance loans can be quite good as you only use this as needed to effectively bring forward the payment of your invoices and better match your cashflow with when you have done the work and incurred the expenses.
As you will appreciate, navigating these challenges requires a proactive approach from a mortgage adviser that knows what they are doing.
Different Types of Self Employed Mortgages
Exploring your mortgage options is like opening a treasure chest of possibilities.
For self-employed individuals, it’s crucial to understand the variety of mortgages available, each with its own set of advantages and challenges.
Bank Mortgages – while bank mortgages often boast lower interest rates, they come with stricter criteria, especially for self-employed borrowers. Meeting the rigorous documentation requirements can be a tough nut to crack too.
Non-Bank Mortgages – on the other hand, non-bank lenders offer specialised mortgage solutions that cater to the unique needs of self-employed individuals. These lenders often have more flexible requirements for proof of income, making them an attractive choice for those who struggle with traditional bank criteria. However, it’s essential to weigh the higher interest rates against the benefits of easier accessibility.
Low-Doc Mortgages – these present another viable option for the self-employed. With simplified documentation requirements, these loans are designed for those who find it challenging to provide extensive financial records. While the interest rates might be higher than standard loans, the convenience of reduced paperwork can be a significant advantage.
No-Doc Mortgages – these are for people who find low-doc options still too demanding. If that’s the case then no-doc mortgages might be a suitable alternative. These loans require minimal documentation but come with a catch—higher costs and larger deposit requirements. Nonetheless, they can be a lifesaver for individuals with complex financial situations who are unable to meet traditional criteria.
Shared Home Ownership – these offer yet another path for self-employed individuals. By partnering with an organisation like YouOwn you can access their equity to purchase a property, making it more affordable. Mortgage Managers are preferred mortgage advisers and one of a very few that can access both bank and non-bank finance to work with YouOwn. Shared home ownership is particularly appealing for those who have lack of savings or struggle to meet income verification requirements.
Engaging with the right mortgage adviser is essential as they can provide insights into all of these options and that helps with finding what best suits your financial position and long-term goals.
Overcoming Common Challenges Faced by Self-Employed Borrowers
When it comes to overcoming mortgage challenges, knowledge and preparation along with a mortgage professional are going to be your best allies.
Many self-employed borrowers find that seeking advice from mortgage brokers familiar with their unique situations opens doors to previously unconsidered options. These experts understand the intricacies of self-employed mortgages and can guide you through the labyrinth of choices and requirements.
Maintaining organised and up-to-date financial records is crucial. By keeping good records that can be easily accessed make the mortgage application process smoother and also have a clearer understanding of your financial position. This helps significantly to improve your chances of securing a loan.
Another thing that certainly helps is a larger deposit. Having a substantial amount saved can give you more leverage during negotiations and open up a wider array of mortgage options. Lenders often view a larger deposit as a sign of financial security, which can offset some of the perceived risks associated with self employed and the irregular income.
Mortgage advisers can also assist in refinancing from non-bank lenders to bank lenders. If you have a good repayment history, a clean credit record, and maintain tidy account conduct with at least 20% equity, you may find banks more willing to offer competitive terms. This transition can often result in better interest rates and repayment conditions, highlighting the importance of maintaining a solid financial track record.
Ultimately, the journey to securing a mortgage as a self-employed individual requires perseverance and strategic planning.
Conclusion
Securing a self-employed mortgage in New Zealand may seem daunting, but with the right mortgage adviser to support you it’s far from impossible.
It’s about knowing your options, and seeking expert advice from an adviser that also knows all the options available. With a clear understanding of the challenges and putting together a strategic approach, together with your adviser you can navigate the finance landscape successfully.
So, are you ready to take the plunge and turn your dream of homeownership into reality?
Frequently Asked Questions
What is a self-employed mortgage in New Zealand?
A self-employed mortgage is specifically tailored for individuals who run their own businesses or work as freelancers in New Zealand. Traditional mortgages often rely on steady income streams from regular employment, but self-employed mortgages take into account the unique income patterns of business owners. These mortgage options might require additional documentation to verify income stability over time.
How can I prove my income if I’m self-employed?
Proving income as a self-employed individual can be a bit more complex. Lenders typically ask for at least two years of financial records, such as tax returns, profit and loss statements, and sometimes even bank statements. These documents help demonstrate consistent income, giving lenders confidence in your ability to repay the loan.
Are there special requirements for self-employed mortgage applicants?
Yes, self-employed applicants often face unique requirements. Apart from providing detailed financial records, lenders might also consider your credit history and the nature of your business. A strong credit rating and a well-established business can greatly improve your chances. It’s also beneficial to have a larger deposit, which can make you a more attractive borrower.
Can I get a mortgage with less than two years of self-employment?
While it’s more challenging, it’s not impossible to secure a mortgage with less than two years of self-employment. Some lenders might consider your case if you have prior experience in your field, a strong credit score, or significant savings.
Consulting a mortgage broker specialising in self-employed clients can be an invaluable step to explore your options.
Do self-employed mortgages have higher interest rates?
Not necessarily. While some lenders might offer slightly higher rates due to perceived risk, many factors influence the interest rate you’ll receive. Your credit score, deposit size, and the lender’s specific criteria all play a role. Your mortgage adviser will shop around and compare different offers, as the fees and rates can vary significantly across some of the non bank lenders.