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How to get a mortgage when you’re self-employed

Whether you’re a sole trader, a freelancer, in a partnership with someone or a director of a limited company, being your own boss comes with a lot of satisfaction. However, when you want to get a mortgage, mainstream bank lenders will ask you to jump a couple more obstacles than the average home loan customer.

Depending on your circumstances, it could be advantageous to consider the non-bank lending channel, which is becoming increasingly popular with Kiwis – especially those who are self-employed.

It’s all about proving your income

Whoever is considering lending you money needs to feel confident that you have the required home deposit and can cover repayments easily. Proving your income and showing that it’s reliable are the foundations for a successful home loan application.

When you work for someone else, proof of income is easy. You usually have an employment contract that details your salary or wages, plus you’ll have bank statements that show remuneration going into your account from your employer.

When you work for yourself, either as a sole trader or a company owner, proof of income means annual financial reporting. If you’ve been in business for a while, you’ll be familiar with the EOFY (end of financial year) statements that are produced annually for your business.

Proof of income for an established business

To prove your income to a mainstream home loan lender, you’ll generally need two years of financial statements. These need to be complete years, so if you’re part way through a financial year when you start looking for a loan, you’ll want financial reports for the previous two complete years. These end-of-year statements should include:

  • Balance sheet: Shows what your business’s financial position is at a moment in time (usually 31 March, the end of the tax year). [1]
  • Profit and loss, or income statement: Shows financial performance for a specific period of time.
  • Cash flow statement: A bit like a bank statement, this records money coming and going for a specific period of time. It provides insights into seasonal patterns and/or cash flow problems.
If you use an accountant, statements are usually presented as a bound, hard-copy report. You’ll probably also receive them electronically, so they can be emailed easily to your potential lender. Keep your statements in a locked cabinet and never throw them away. They provide a valuable track record of business performance.

You’ll need an open bridging loan if you want money to settle on a new property before you have a signed sale and purchase agreement for your old property. You might have people interested, but the deal hasn’t been done yet. This type of bridging loan is more risky than the closed type, because there’s no end in sight. Consequently, borrowers will make you jump through more hoops before approving the loan and they might charge you a bit more.

Proof of income for a new business or start-up

If you’ve only recently started working for yourself, you face a greater challenge. Your track record of income-earning is short, so the preferred two years of financial statements won’t be possible.

If you’re doing spectacularly well, you can ask an accountant to provide you with a cash flow forecast, based on your business performance to date. Another proof of income could be contracts or agreements with key customers.

Interestingly, if you’re currently toying with the idea of working for yourself, it might be better to apply for a home loan while you’re still employed by someone else. Just saying.

Proof of income when your income comes in bursts

If you’re a freelancer who likes to work hard in winter and surf all summer, your cash flow will have highs and lows. Cash flow fluctuations can also happen to contractors who work intensely for a few months, then take a few months off.

The challenge with a business that has ebbs and flows is income reliability. Some lenders will want to see a financial track record that allows them to average out your income over a few years. But don’t despair, there are non-bank lenders with flexible criteria that allow them to bend over backwards to help you.

Looking good for your lender

First impressions count when you’re applying for a home loan, whether you’re an employee or working for yourself. Think of it as a job interview and make an effort with your appearance. You want to look successful, confident and totally together – especially if you don’t have the preferred two years of financial statements or if your business performance is patchy.

As we all know, the pandemic situation has hit some businesses hard. If your most recent financial statements are showing a decline in sales and profits, you might want to also show previous years’ statements, so the potential lender can see how things used to be.

If you do your business accounting with Xero, you or your accountant have the ability to send reports directly to a potential lender. The Xero Business Finance Pack generates reports that are commonly requested by New Zealand lenders and puts them together in a PDF file.

Preparing a budget

As a business owner, you still need to eat and pay bills, so lenders will want a clear view of your household’s monthly outgoings, i.e. a budget. To make this easier, we have a great online budgeting tool.

To create an accurate budget, you’ll need to audit your annual expenditure. Usually this can be done through online banking or using paper statements. Lenders want to see a realistic budget, so this is not the time to introduce severe austerity measures, like deciding to live on bread and water from now on.

After you’ve analysed your actual spending, a few nips and tucks could be in order. However, your budget going forward should reflect how you really live. It’s OK to factor in things like eating out and holidays, because allowing for some fun makes a budget easier to stick to.

Show off your deposit

Of course, going on the hunt for a home loan means you have a deposit tucked away safely somewhere. If possible, this money shouldn’t be tied up in your business – unless the business is actually buying the property.

  • If the loan you want is for a first home, there are now opportunities to get a home loan with a deposit as low as 5%. We’ve written a guide to first home deposits that you’ll find useful.
  • If you’re moving up the property ladder and aiming for a bigger or better home, you’ll generally need at least a 10% deposit. But be aware that restrictions and/or conditions may apply if your deposit is less than 20%.
  • If you want to buy an investment property, you’ll generally need at least a 40% deposit.
As a rule, the bigger your deposit, the easier it will be to find a favourable home loan. Lenders might get twitchy when you have big ambitions and an only-just-big-enough deposit

The language of non-bank lending channels

Before we explain more about non-bank lending channels, here’s some terminology to get your head around:

  • Prime – a word used to describe high-quality borrowers. ‘Prime mortgages’ are offered to borrowers with good credit histories and income levels that can easily sustain repayments. Prime mortgages come with the lowest interest rates.
  • Full doc – another word for ‘prime’ that’s used by bank and non-bank lenders. Top drawer borrowers are offered ‘full doc’ loans.
  • Near-prime – used to describe a new type of home loan for borrowers who are just outside main bank lending criteria. It’s also used to describe a tier of lenders, i.e. near-prime lenders.
  • Alt doc – this term is used to describe an ‘alternative documentation’ loan that lets home loan customers qualify for a loan using non-traditional documents and assets. An alt doc loan has different approval standards, so is good for borrowers with fluctuating income and those who can’t offer two years of financial statements.
  • Low doc – another way of saying ‘alt doc’.
  • No doc – used to describe a loan that doesn’t depend on income verification from the borrower. It rests on a declaration that says the borrower can afford loan repayments. This type of loan is usually secured on the value of the property. As a rule, a no doc loan requires a bigger-than-usual deposit and commands a higher interest rate.

A closer look at non-bank lenders

There’s always been a non-bank lending channel in New Zealand. You’ll see some of the players on our rates page, listed after the main banks. These private equity financiers are becoming increasingly popular – especially in pandemic times, when business performance is harder to predict.

In recent years, non-bank lenders have become a genuine alternative for borrowers. For prime mortgages (aka full doc), where you have robust proof of income and can clearly show your ability to repay a loan, their interest rates are often very similar to those offered by banks.

The main point of difference between banks and non-bank financial institutions is that non-banks don’t hold a New Zealand banking licence. That means they can’t offer deposit accounts, such as everyday transaction accounts and savings accounts. Another point of difference is that non-bank financial institutions are privately owned. [2]

Unlike banks, non-bank lenders are not governed by the Financial Markets Authority or the banking ombudsman. But they are regulated by the Reserve Bank which is very reassuring.

To find a selection of private lenders, just google ‘non-bank home loans New Zealand’. The various types of loans they offer, and associated interest rates, can found on their respective websites.

Scenario 1: Established sole trader

Aaron’s been working for himself for four years. He’s a plumber with more than a decade of work experience. Business is always brisk.

This year Aaron married his high-school sweetheart Emma and they decided to buy their first home. Together they have a 20% deposit – some savings, some from a Kāinga Ora First Home Grant and the rest is in Emma’s KiwiSaver.

Emma is an employed preschool teacher, so proving her income is easy. She gets payslips. Aaron’s OK too, because he wisely chose to work with a local chartered accountancy firm that specialises in looking after tradies. Emma and Aaron’s banking life is all with one mainstream bank, so that’s where they want to source their home loan. Before meeting with the bank’s home loan specialist, they prepare a joint budget to show how they spend their money.

OUTCOME: The bank pre-approved their loan, based on Emma’s reliable income and the level of profitability shown in Aaron’s business over the past two years. So now they can start hunting for the right house.

Scenario 2: Café start-up

Moana and her business partner opened a café in the centre of a provincial city six months ago. They did their homework and picked a location with excellent foot traffic and plenty of nearby office workers (who need lots of coffee and avocado on toast). The future is looking bright for the café, although there’s always the possibility of a Covid-19 lockdown. Thankfully, they’re in the provinces so that’s less likely to happen.

The other week Moana noticed a classic 1960s brick and tile unit for sale just 10 minutes’ drive from the café. She’s tired of paying rent and wants her own place. After doing some research, Moana is pretty sure the unit is within her means. Her KiwiSaver will provide the deposit; she can clean everything out of it, except for $1000.

With just six months of trading behind her, Moana knows her mainstream bank won’t see her as a credible home loan customer. To save the pain of rejection, her plan is to find an alternative lender.

Online research on the mortgages.co.nz rates page reveals some lenders Moana hasn’t heard of before. Their interest rates are in the same ballpark as the main banks; in some cases they’re actually lower.

OUTCOME: After meeting with a couple of non-bank lenders, Moana chooses an ‘alt doc’ loan option that doesn’t require two years of financial statements. Her lender was happy with a cash flow forecast that reflected her business success to date.

Keep an open mind and don’t give up on your dream

The moral of this story is, there’s more than one way to finance a house. New Zealand is a nation of small businesses, so self-employed home loan applicants deserve to be treated with dignity and respect. We recommend you consider the entire playing field before drawing up a shortlist of potential lenders. There’s a loan out there that’s just right for your circumstances.

Want to build instead of buying an existing home? Read our guide to funding a new-build.

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