Why is it harder to get finance when you are self-employed?
Being self-employed can make it harder to get a loan - thankfully there are other options out there if you know where to look.
Self-employment is a popular option for many Kiwi workers. Free of the constraints of being told what to do, being self-employed provides the opportunity to work at a speed that best suits you.
Plus it means you can explore the opportunities you want to explore. It’s no wonder the number of self-employed workers has grown considerably in New Zealand in the last few years.
Data from Statistics New Zealand shows there are more than 300,000 self-employed workers in New Zealand and that in the first quarter of this year alone the number grew by 25,000.
While self-employment may bring flexibility and freedom – it can also have its downfalls, like making it harder to get a loan from the bank.
Why do the banks make it harder for self-employed workers?
Because self-employed workers often earn an irregular income, traditional lenders treat them differently to those that earn pay as you earn (PAYE).
Lenders like to know the borrower will be able to meet the repayments on the loan and to do this they want to see consistent income, which because of the fluctuating nature of self-employed work, makes it hard for some.
In most cases the lender will ask to see the two most recent years' financials. While this may be easy for some, those just starting out in business or who haven’t had time to do their tax returns yet, will find it hard to get approved.
So what options do self-employed workers have?
Thankfully there are lenders in the market that are more flexible in how they assess a person’s income and therefore have loans tailored to the needs of the self-employed.
These loans are often referred to as low-doc loans. The benefit of a low-doc loan is that the lender will accept alternative forms of documentation to verify an applicant’s income.
For example the lender may only require six months’ worth of bank statements, plus they are also able to look at the applicant’s whole story.
Where do you find these lenders?
The level of documentation required for a low-doc loan will vary from lender to lender, so it’s best to talk to a mortgage broker about the different options available.
If you’re self-employed and need finance to purchase property, speak to a Mortgage Broker at Cartwrights.
Article Brought to you through Mike Pero and Cartwrights