If you’re self-employed and have tried to borrow money to buy property in Australia, you’ve probably had to jump through a number of frustrating hoops in order to prove you can service the loan.
Even though you know you’re “good for the money”, it seems like you’re treated as guilty of default on suspicion by lenders and have to satisfy extra layers of serviceability assessments.
And until recently, that added burden of proof was very paperwork-heavy and time intensive.
Historically, income verification for the self-employed has required borrowers to produce many documents, from a period of up to 2 years.
These may have included company/business/trust financial statements and tax returns, individual tax returns, individual notices of assessment from the ATO, business records and more.
‘Low doc loans’, where borrowers who could not provide the required paperwork, but had steady income, had already been around for some time, among a few other alternative options, but those borrowers could not expect as favourable rates and features as others.
How about now?
Australians have largely changed the way they work and there are many more self-employed, contractor, freelance or consultant borrowers than there used to be.
In fact, an IBISWorld study from 2021 found that nearly 80% of workers in industries such as financial services, construction, farming and photography are self-employed.
Banks have therefore had to evolve in order to compete for those borrowers’ business.
In 2021, something had to give, especially as the nation’s businesses struggled under the weight of the pandemic lockdowns.
One of the big effects for a lot of self-employed, was that their income streams were reduced during Covid restrictions, so if they applied for a loan at some stage, that period would have brought down their 2-year income averages, even if they had since begun earning more again.
Banks get on board
CBA was the first of the big four banks to change its assessment process, so that self-employed borrowers who could prove they had paid themselves a wage for 6 months, could use that income alongside a letter from an accountant confirming the wage could continue to be paid and the business could meet its own commitments.
Since then, things have evolved further and more lenders have got on board. And you would think the space will continue to be disrupted and improved as the collection of data continues to advance, alongside technological capability.
Rose Renouf from Zinger Finance says there are differences between lenders that self-employed borrowers should be aware of. For example, some will take into account the salary a borrower pays themselves for the entire financial year when considering a loan application, while others will accept the most recent 6 months.
“So if I had been paying myself a salary of $100,000 a year for the first 5 months and then $150,000 a year for six months, they will accept $150,000,” Rose says.
Faster finance to suit entrepreneurs
The streamlined approval process is now more suited to the fast-paced nature of entrepreneurship. Self-employed professionals in start-ups or growing businesses may need quick access to capital to expand their businesses further or take advantage of investment opportunities as they arise. Simplified verification means they can secure funding before the window of opportunity closes.
Company’s better than going sole
Not all self-employed are equal in the new, simplified verification landscape, Rose, Head of Zinger Finance says.
“If you are a sole trader, you should think about speaking to your accountant and changing to a company structure,” she says. “Banks will assess Pty Ltd companies or trusts in some cases, but they won’t do sole traders and partnerships”.