How To Prepare Your Finances Before Applying for a Self-Employed Mortgage
Unlike salaried employees, self-employed individuals face unique challenges when seeking home loans. Lenders typically require more documentation to assess the ability to repay the mortgage.
So, how can you set yourself up for success in securing a self-employed mortgage while also protecting your ability to repay it over time? Our team of experts guide you through the key strategies to ensure a smooth application process and long-term stability.
Prepare Your Finances Early
The first step in preparing for a self-employed mortgage is making sure your finances are in order. Lenders will closely examine your income, expenses and credit history, so it’s important to have a clear financial picture.
- Start by reviewing your tax returns from the past two years, as self-employed individuals are often required to provide at least two years' worth of income documentation.
- To increase your chances of approval, consider reducing business expenses and maximising your taxable income in the months leading up to your mortgage application.
- Consider consulting an accountant to optimise your financial reporting.
According to the Australian Bureau of Statistics, over 20% of the Australian workforce is self-employed, and these workers often face challenges proving stable income for loan approval.
Build a Strong Credit Profile
Your credit score plays a major role in the mortgage approval process. Lenders prefer borrowers with a good credit history, as it demonstrates your ability to handle financial obligations responsibly. Self-employed individuals should regularly check their credit reports to identify and resolve any discrepancies.
To improve your credit score before applying for a self-employed mortgage, focus on paying off any outstanding debts and avoid missing payments on current obligations. The higher your credit score, the better your chances of securing favourable loan terms, such as lower interest rates.
Larger Self Employed Mortgage Deposit
A larger deposit can significantly improve your chances of getting approved for a mortgage. With a larger down payment, you demonstrate financial stability and reduce the risk for lenders. A deposit of at least 20% is ideal, as it allows you to avoid paying for Lenders Mortgage Insurance (LMI), which can add substantial costs to your mortgage.
Additionally, having a larger deposit shows lenders that you’re serious about your investment and that you have a strong financial foundation. You’ll be able to borrow more with less risk and this can ultimately make your mortgage more manageable.
Diversify Your Income Streams
While earning enough money every month is important, relying solely on one income stream can leave you vulnerable in the long term. For self-employed borrowers, it’s crucial to demonstrate multiple income sources, which can add security and show that you’re financially stable.
If possible, consider diversifying your income by taking on a side business or generating additional revenue streams. Having a stable and diversified income will not only improve your mortgage application but also provide additional protection if one stream of income diminishes.
Protect Your Income & Repayment Ability
Once you’ve secured your self-employed mortgage, protecting your ability to repay over its lifespan is essential. A key strategy is to purchase income protection insurance, which can safeguard your repayments in the event of illness or injury. This type of insurance ensures that you can continue making your mortgage payments if you’re unable to work, offering peace of mind in uncertain times.
Also consider creating an emergency fund to cover unexpected expenses. A healthy emergency fund, typically three to six months’ worth of living expenses, ensures that you can handle financial setbacks without jeopardising your mortgage repayments.
Long-Term Financial Planning
Work with a financial advisor to create a sustainable budget and develop strategies for long-term savings, investments and retirement. This proactive planning will not only help protect your ability to repay the mortgage but also ensure your financial health beyond homeownership.
Need help with your self-employed mortgage? Secure the best deal today!