Whether driven by necessity or by the benefits of flexible working hours, more and more Australians are switching over to casual employment. In fact, in August 2021, Australia’s number of casual employees hit 92.4% of the February 2020 levels. This was above the low of May 2020, when it touched 79.4%.
With an increasing number of casual workers, Australians have a common question: Can you get a home loan with a casual job? The short answer is yes, it is possible. However, some key considerations play into your chances of approval on your application.
What kind of jobs are considered casual employment?
You are considered a casual worker if you accept a job offer from an employer with the clear understanding that you do not have any firm advance commitment to ongoing work with an agreed pattern.
For example, if your weekly roster changes to suit your employer’s needs, and you can refuse or swap shifts, it could mean you are casually employed.
Casual employees usually don’t work regular hours and are not eligible for paid leave, including annual and sick leave. Unless stated in an employment contract or formal agreement of sorts, shorter-term casual employees can leave their jobs or be terminated from them without any prior notice.
On the other hand, casual workers may usually be paid a bit more to compensate for the lack of other benefits. Suppose a casual employee stays in the same organisation for an extended period, i.e., beyond 12 months. In that case, they are considered ’long term casuals’ and may qualify for some benefits.
As per an industry report, casual workers are employed in all sectors in Australia. However, the hospitality, retail trade, healthcare, and other service sectors were the leading sectors offering jobs on a casual basis.
Retail and hospitality alone accounted for 37% of casual employees, while over 80% have casual jobs in small to medium businesses.
Does casual employment affect your home loan application?
If you hold a casual job and are actively looking for a home loan, you should know that there are home loans for people with casual employment in Australia if you meet the eligibility requirements.
However, offering home loans for casual workers come with a higher risk due to the fluctuating income of the home buyers. If your income fluctuates, there’s the fear that you’ll default on your monthly repayments.
Though lending criteria vary due to the lender’s risk, loans for casual workers do come with certain strings attached.
Qualifying for a home loan
The lender’s eligibility criteria will determine how different lenders assess your home loan applications. For casual workers to qualify, they should be in their job for at least six months. Some may even accept three months, but on a case by case basis.
If you have been employed in the same industry and/or the same job type for at least six months, you can qualify for a home loan. Lenders feel more reassured on seeing that you have a history of employment in the same field of work. This does not apply to seasonal jobs, where income is earned only during the work season.
Some lenders will accept 100 per cent of your casual income (annualised), while others may shade your income, decreasing your borrowing power.
Generally, most lenders allow you to borrow up to 90% of the total property value, but you should be employed for at least six months. If you’ve been employed for a minimum of 12 months, some lenders may upscale your borrowing power to 95 per cent of the property value.
If you have a guarantor and a relatively strong financial position, you may be allowed to borrow up to 105 per cent of the property value. Likewise, if you work only a few hours each week, your borrowing capacity will be reduced.
In Australia, credit reporting agencies like Equifax compile your credit score. Most lenders run thorough checks on the credit rating of casual employees when they apply for home loans. A good credit track record improves your chances of getting a home loan approved.
If you have a bad credit score, some lenders offer you a loan with a stricter set of terms and conditions, such as a significantly higher interest rate and lower borrowing range. With a bad credit score, the chances of your application getting declined are also higher.
Generally speaking, a casual worker is considered a high-risk group. Therefore, your chances of qualifying for a home loan with less than a 20 per cent deposit are bleak.
If you have a Loan to Value Ratio (LVR) of 80%, it implies a 20% deposit saved, and you need to borrow the remaining amount. Understanding LVRs can help you avoid applying for a loan that is not feasible.
If you’re borrowing more than 80% of the property value, you will have to pay Lenders Mortgage Insurance (LMI), adding a significant amount of dollars to the total cost of your home loan.
Higher fees and rates
If the bank considers you a high-risk borrower, they may levy a higher interest rate than they do on PAYG borrowers. Nevertheless, this may be a small price, considering that you will get a home loan if you take some time to hunt for the best deal.
Verification by an accountant
Some lenders may want to contact your accountant and directly verify your income. It may be suitable for starters to get an accountant to look into your documentation.
Home loan specialist
Since some lenders shy away from home loans for casual workers, you will have to work within the limited options of home loan specialist lenders for those in casual employment.
A special mention for casual teachers looking for a home loan, some who work casually for an indefinite period. If you are a casual teacher, you work only 40 weeks per year without income during the school holidays.
Fortunately, some lenders may only annualise 40 or 42 weeks per year of income, compared to, for example, the retail sector, where they may annualise up to 52 weeks’ worth of casual income per year.
To qualify, you must prove that you have been a casual employee for at least three months and provide bank statements and payslips showing your consistent earnings during this period.
Benefits and Limitations of Having a Home Loan with Casual Employment
You’ve cleared the first significant hurdle if you get approved, which is a good sign. You should also know that are benefits and limitations for those with a casual employment home loan.
Based on your casual income, you can choose the type of loan that works best for you, whether the flexibility of a variable rate or the certainty of a fixed rate. Some lenders will give you the option to operate your loan in variable and fixed-rate components.
LMI and other waivers
If you are a home buyer purchasing your first home and have applied with a guarantor, you qualify to borrow up to 105 per cent of the purchase price without paying LMI.
Some LMI companies even offer good discounts on their LMI premiums for first home buyers through special arrangements with home loan lenders. Moreover, casual workers who are first time home buyers qualify for stamp duty exemption.
Some lenders will allow you to link an offset account for your variable rate home loan. The offset facility is mainly offered on variable rate home loans.
As the name suggests, an offset account will offset the balance in that account against the remaining balance of your variable rate home loan. In this way, only the interest on the difference will be charged to you.
Many home loan buyers favour the offset account option. It helps them pay off their home loans and get homeownership ahead of time whilst saving money over the life of the loan. All this just by depositing regular earnings into the offset account.
A word of caution, these accounts may have additional monthly fees, so do your math before moving ahead.
Higher chances of default
Casual workers are prone to fluctuations in monthly income and are more likely to face irregular and insufficient work hours, affecting the home loan repayment capabilities.
If you consistently default long your mortgage repayments, eventually, the lenders will be forced to take the extreme step and sell your property to recover the debt.
Need to create an Emergency Fund
Having received the approvals and knowing the vagaries of your job, you should allocate money in an emergency fund to make home loan repayments should you become unemployed during the home loan repayment period.
Ideally, you should have three months of payment set aside to provide an excellent buffer to get sorted. This means you will have to cut corners on other expenses or postpone them for the time being.
Delay in reporting
If you are at the risk of defaulting on your loan, the best way ahead is to appraise your lender about the situation so they can assist you in identifying the best recourse.
Case study: Jane, a Casual Worker, applies for a Home Loan
Let’s take the case of Jane to illustrate how a casual worker can successfully get around to securing approvals for a home loan.
Jane has been employed in casual work, teaching creative writing on a contract basis at a university in Sydney for four years.
A few months ago, Jane decided that she wanted to buy her own first home and needed to apply for a home loan. She had about $50,000 in her savings account. This amount put her in a relatively good position to cover the cost of her rent and other monthly expenses.
Jane looked around and zeroed in on a lender who studied her gross income and was confident that he could afford to pay a mortgage repayment up to about $2000 a month.
The lender worked out the modalities and, ensuring that Jane could still manage to keep a suitable buffer, offered Jane a loan amount of $350,000 at an interest rate of 2.5% for 30 years.
Over and above, being a first time home buyer in NSW, Jane was eligible for stamp duty exemption.
How Casual Workers Can Secure a Home Loan
Here are some tried and tested ways for casual workers to improve their chances of a stress-free home loan application.
Low doc loan
If you are not a permanent employee, low doc loans are one of the most common home loans for casual workers. As loans to casual workers are thought to be riskier than traditional home loans, a low doc home loan often comes at a higher interest rate. Some lenders may consider applying for a lower maximum LVR, so you could pay up a larger deposit.
Save up to pay a good deposit
Aim to provide at least 20% of your property value as a deposit. This will reassure your lender that you can save some part of your earnings and are financially stable and may help you get a home loan with your casual employment.
Choose affordable locations
Settle down for a more suitable location given your casual employment status. Borrowing with prudent limits will keep your borrowing amount more realistic and improve your chances of getting a home loan.
Be consistent and remain in the same line of work
Lenders require consistency. So while holding a job in the same company for a longer time could up your chances of securing a home loan, remaining in the same stream of work will help to enhance your home loan application.
So even if you have recently switched jobs but are still working in the same industry, i.e., a software developer in the retail sector, you still would stand a better chance of qualifying for the loan.
Clean up your credit file
If your credit score isn’t too good, it may be in your best interests to improve it before applying for a home loan.
Do note that lenders have their norms for assessing the credit scores of the home loan applications. However, you could work around this by comparing the options available before settling on a home loan.
With your options for home loans already narrowed down due to your casual employment, teaming up with a reliable mortgage broker can improve your overall chances of getting approved for a home loan.
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