For self-employed individuals in New Zealand, securing a mortgage can feel like an uphill battle. Without the steady, regular income associated with salaried jobs, self-employed borrowers often face stricter lending criteria and more extensive documentation requirements. However, with the right preparation and approach, it is entirely possible to obtain a home loan that meets your needs. This article provides practical tips to help self-employed borrowers navigate the mortgage application process and improve their chances of success.
Understand why lenders view self-employment differently
Lenders tend to view self-employed borrowers as higher risk compared to salaried employees. This is primarily due to the perceived instability of self-employment income. While an employee may have a consistent salary, a self-employed individual’s income can fluctuate based on factors such as market conditions, client demand, and the nature of their business.
Because of this variability, lenders require more detailed evidence of your financial stability and your ability to make consistent mortgage repayments. Understanding this perspective can help you anticipate the information lenders will need and prepare accordingly.
Build a strong financial foundation
A solid financial foundation is essential for any mortgage application, but it’s particularly important for self-employed borrowers. Here’s how you can strengthen your financial position:
- Maintain accurate financial records Lenders will want to see a clear picture of your income and expenses. Ensure your financial records are accurate, up to date, and professionally prepared. This includes maintaining profit-and-loss statements, balance sheets, and tax returns for at least the last two years. Working with a qualified accountant can help you present your financials in the best possible light.
- Show consistent income Consistency is key. Lenders prefer borrowers who can demonstrate stable or growing income over time. If your income varies significantly from year to year, be prepared to explain the reasons and provide evidence of any seasonal trends or business growth.
- Reduce your business and personal debt High levels of debt can be a red flag for lenders. Pay down existing debts wherever possible to improve your debt-to-income ratio. This includes both business and personal debts, as lenders will consider your total financial obligations.
- Save for a larger deposit A larger deposit can improve your chances of securing a mortgage, as it reduces the lender’s risk. Aim for at least 20% of the property’s purchase price, though some lenders may accept a smaller deposit if you have strong financials or meet other criteria.
Prepare the necessary documentation
Self-employed borrowers typically need to provide more documentation than salaried employees. Be prepared to submit the following:
- Proof of income: This may include tax returns, profit-and-loss statements, and evidence of business income (e.g., invoices and bank statements).
- Business financials: Lenders may request recent balance sheets and cash flow statements to assess the health of your business.
- Tax compliance: Provide evidence that your taxes are up to date, such as a certificate of tax compliance from Inland Revenue (IR).
- Personal identification: Standard documents such as your passport or driver’s licence.
- Bank statements: Personal and business bank statements showing your income and expenses over the past six to twelve months.
Having all these documents ready and organised will make the application process smoother and faster.
Work with a mortgage broker
Navigating the mortgage market can be complex, especially for self-employed borrowers. A mortgage broker can be an invaluable resource, helping you identify lenders that are more accommodating to self-employed applicants. Brokers often have access to a wide range of lenders, including smaller or specialist lenders, and can negotiate on your behalf to secure favourable terms.
A good broker will also help you prepare your application, ensuring you present your financial situation in the best possible way. This can make a significant difference in your chances of approval.
Keep your credit score healthy
Your credit score is a key factor in any mortgage application. It reflects your creditworthiness and provides lenders with insight into your financial habits. To maintain a strong credit score:
- Pay all bills and debts on time.
- Avoid taking on new debt in the months leading up to your application.
- Regularly check your credit report for errors and address any discrepancies.
If your credit score is lower than desired, focus on improving it before applying for a mortgage. This might mean waiting a few months to build a stronger financial profile.
Be realistic about your borrowing capacity
While it’s tempting to aim for your dream home, it’s important to be realistic about what you can afford. Use a mortgage calculator to estimate your borrowing capacity and repayments based on your income and expenses. Keep in mind that lenders will also assess your ability to handle higher interest rates in the future, so ensure you’re comfortable with potential rate increases.
Explain your business and income sources
Many lenders will want to understand your business model and how you generate income. Be prepared to explain your business in detail, including:
- The nature of your work and industry.
- How long you’ve been in business.
- Your typical income streams and major clients (if applicable).
- Any factors that contribute to income fluctuations and how you manage them.
Clear and honest communication can help build trust with your lender and demonstrate your financial reliability.
Consider alternative lending options
If traditional banks are hesitant to approve your application, consider alternative lending options such as:
- Non-bank lenders: These lenders often have more flexible criteria for self-employed borrowers.
- Low-doc loans: Some lenders offer low-documentation loans, which require less paperwork but may come with higher interest rates or stricter terms.
- Guarantor loans: If you have a family member willing to act as a guarantor, this can strengthen your application and improve your chances of approval.
Keep in mind that these options may have additional risks or costs, so weigh the pros and cons carefully before proceeding.
Maintain financial stability during the application process
Once you’ve submitted your application, avoid making major financial changes that could affect your eligibility. This includes:
- Taking on new debts or credit cards.
- Making large, unexplained withdrawals from your accounts.
- Changing jobs or altering your business structure.
Consistency is crucial, so aim to keep your financial situation as stable as possible until your loan is approved.
Securing a mortgage as a self-employed borrower in New Zealand may require more effort and preparation, but it’s far from impossible. By building a strong financial foundation, maintaining accurate records, and working with experienced professionals, you can significantly improve your chances of success.
If you’re ready to take the next step, Lendal Mortgages can help. Our team specialises in assisting self-employed borrowers, providing expert guidance and tailored solutions to meet your unique needs. Contact us today to start your journey towards home ownership.