In the past few decades, non-conventional forms of employment, including freelance and contract worker jobs, have grown in significance in the Australian economy. As a result, many employers consider contractors a suitable hiring option.
According to ABS, the country's 1.0 million independent contractors represent nearly 7.8% of all employed. In addition, here's a snapshot of Australia's thriving independent contractor economy:
- Various industries employ contractors, including construction, professional, scientific and technical services, healthcare and social assistance, transport, education, manufacturing, retail, finance, agriculture, mining, media, recreation services, etc.
- The industries with the most numbers of independent contractors include construction (25%), administrative and support services (18%), and transport, postal, and warehousing (13%).
- Occupations with the highest proportions of independent contractors are technicians and trades workers, labourers, machinery operators and drivers.
From independent tradespeople to IT specialists, managers, sales workers and freelance journalists, contractor jobs are getting increasingly popular nowadays.
Not only can you pick and choose the jobs you want to take on, but based on your role, your work hours may be flexible. Moreover, some contract roles require specialist skills and are among the best-paid workers.
At the same time, your contractor income can make lenders somewhat wary of your application. This article addresses some common queries and will also help you understand how you can better the prospects of getting your home loan approved.
Can I Get a Home Loan with a Contract Job?
For starters, yes. However, it can be slightly more challenging than other applicants who are employed full-time.
Why Lenders will Treat your Home Loan Application Differently
Contract workers are generally treated as casual employees and viewed as an unstable employment arrangement. Unlike salaried employees, you may not have a steady, fixed income with regular pay slips nor earn PAYG (Pay As you Go) income as evidence of continuous employment.
Lenders may also find it challenging to track your income if you're a self employed contractor. This makes it more complex for them to determine whether you have a solid financial position to make monthly repayments. All this regardless if you are earning well or have plenty of opportunities for future employment in your industry.
Therefore, you may consider options like ‘Low Doc Home Loans’ instead of applying for a standard home loan. These loans take up less paperwork but usually have a higher interest rate.
What Lenders Look for When Assessing Contractor Home Loans
To safeguard their interests and minimise the chances of defaults, most lenders are generally more stringent when assessing home loans for contractors. In addition, they often lend at a higher interest rate or lower borrowing limits for contract workers.
According to Graeme John, Head of Growth at Joust, "To sum up, some lenders will look favourably at your application even if you are self employed. However, what matters is if you can afford to make your monthly repayments and sustain timely ones in the future. So ultimately, it narrows down to your financial situation, circumstances and the lending criteria of your mortgage provider."
Here are some of the factors your credit provider will consider when evaluating your application for a home loan on your contractor income:
Your lenders will assess the nature and level of current income and your existing contracts. They will also seek details about your future contracts and work arrangements
Lenders also are more likely to approve your application if you have a minimum of two years of experience within the industry.
Your lender will want to know your objective of taking a loan - whether you will be an owner-occupier or is it for property investment purposes?
The loan amount you plan to borrow, your borrowing capacity, the amount you have saved up to put as a deposit, and your Loan to Value Ratio (LVR) will help them determine if you qualify for a loan on your contractor income. Lenders Mortgage Insurance (LMI) may also be assessed to calculate the risk of your home loan application.
Lenders also want to know if you're applying singly or jointly with other applicants and their income status. This impacts their assessment of your application.
Factors such as your living expenses and the number of dependents you support, including your children, are taken into account by your relevant credit provider.
Your borrowing history and credit score, the amount of existing debt and your other repayments and financial commitments will be assessed by your lender.
How Lenders Treat Different Types of Contractors
Banks assess contract workers differently depending on the contractor's payment terms and conditions.
Understanding your income type and whether your income will be treated as a PAYG employee or a self employed contractor can help you identify competitive loan options matching your requirements.
Subcontractors comprise a distinct category of contractors and can be employed on either a PAYG or self employed contractor basis. Subcontractor hiring is relatively common in the construction, IT, and mining industries, where contractors are externally commissioned and often enjoy good pay.
If applying for a home loan for subcontractors, establish whether your income is self employed or PAYG to decide which home loan options you can access. Your lender will calculate your liabilities by balancing your income and expenses.
If you earn a good salary and your skill sets are in high demand in the industry, you may qualify for a loan without much hassle. In addition, your application may be a relatively low risk to your lender as you are well equipped to repay your loan amount.
In fact, the more detailed income evidence you provide, the more likely you are to get approved sooner. If you plan to apply for a home loan shortly, do work building your savings as much as possible to enable more money in your account for making timely repayments.
If you're a PAYG contractor, you may be employed on a fixed-term, long-term or short-term contract with one primary employer. In most cases, the end date - and sometimes your roll-over to a new contract - will be specified clearly.
You would be getting payslips regularly, on a monthly or fortnightly basis. In addition, based on your contract terms, you may have holidays and sick leave benefits, automatic tax withholding and super paid for by your employer for the period of your employment.
If you're a PAYG contractor working a commissioned job, your chances of getting qualified will improve if you show a good track record of experience within the same industry and strong employment potential in future.
Your lender will review your past financial history where you receive overtime payments regularly; some lenders may also include it in your assessable income
In general, many lenders need over 12 months in your current job as proof of a continuous contract.
Self Employed Contractors
Self employed contractors mostly work as sole traders and may work with multiple clients. As a self employed contractor, you won't receive any leave benefits, a regular salary or payslips. Instead, you need an Australian Business Number (ABN) to invoice your clients and receive payments.
Like some self employed contractors, you may have even set up your own company or trust that enters into the contract and then employs you on a PAYG basis.
To qualify for a home loan as a self employed borrower, you should have completed at least two years in your current role to get a mortgage.
At the same time, some lenders may offer some relaxation and approve your application even if you contract with one primary employer and work for an hourly or daily rate. Likewise, if you are the only employee and have no significant expenses.
When reviewing your application, your lender will seek proof of current income, including invoices and prior income.
Usually, your lender will calculate your average income, deducting the GST component, if any, while considering 2 – 4 weeks in unpaid holidays annually.
The good news is that if you can show two years of income evidence, it may not be as challenging to get a loan as a self employed contractor. If your lending institution can track your employment and you show regular income, your lender will be able to calculate your monthly repayment capacity.
Though paid very well, mining contractors are generally commissioned for short-term contracts and move between mines based on job availability. So, getting approved for a home loan can be an uphill task if you are a mining contractor.
At the same time, if not renewed, mining contracts get replaced relatively sooner without impacting the contractor's repayment potential. Some lending institutions consider this point and pursue a more practical approach while assessing your application for a home loan. This considerably increases your chances of approval.
IT consultants are among the country's most common contractors and the highest-paid workers. Considering the high employer demand, they are relatively low-risk applications. Nonetheless, home loan applications of IT contractors are often declined as many lenders do not clearly understand how the industry works and the nature of their contractor income.
If you’re an IT contractor, do your groundwork carefully and choose a lender who understands the intricacies of your field to minimise your chances of rejection.
If you're a construction contractor, then it's most likely that you work on a construction project till completion, or the terms of your contract are such that you take up projects for the company continuously.
If you only provide the labour, your application may be reviewed like any other contractor. However, where you use your own materials, your lender may classify you as self employed and review your application at par with a self employed contractor. In such circumstances, you will need to show your tax returns for the past two years.
Freelancers and Journalists
If you're a freelancer or a journalist working on a contract, you're probably paid per task or article and may be employed for several projects.
As a freelancer, your lender may assess your income based on the frequency, ongoing nature and reliability of your income.
In most cases, freelance contractors within this scope must show tax returns for the past two years as income evidence to qualify for a home loan.
Are There Specific Home Loans for Contractors?
You can access a range of home loan products suited to your specific circumstances. Here are some top picks.
Full Doc Home Loan
If you've been working as a contractor for a significant time, you may qualify for a standard full documentation home loan by showing relevant documentation regarding your income. This may include your tax returns and assessments from the past two years, recent business bank statements and profit and loss statement.
It's worth noting that in case you are unable to show tax returns and assessments from the past two years based on your contractor role, you will not be able to qualify for a full doc home loan.
If you are looking for an LVR of over 80 per cent on your full doc loan, you will need to pay the LMI. This upfront fee is charged to those seeking to borrow more than 80 per cent of their property value. Therefore, LMI could increase the overall cost of your loan substantially.
Low Doc Home Loan
To qualify for a low documentation home loan, you will have to provide a signed income declaration/accountant statement, your Business Activity Statement (BAS), and your recent business bank statements.
If you've recently started working as a contractor and cannot provide the relevant documentation to be approved for a full doc home loan, then a low doc loan may be the ideal pathway to qualifying for a home loan.
Since the amount of documentation is less than a full doc loan, your lender will treat your application as a high-risk borrower. Therefore, you may have to put out a fatter deposit than a full doc loan. However, the general benchmark for LVR on a low doc home is 80 per cent, which means you won't need to pay any LMI.
Nonetheless, you may still be able to access some excellent deals and loan features on a low doc home loan with interest rates and features similar to a full doc home loan.
No Doc Home Loan
A no documentation home loan is one where you are unable to provide any of the documentation to support your income.
Interest rates and deposit levels are generally higher in the case of a no doc loan because they are considered most risky. However, your LVR should be lower than 80 per cent for any lender to approve your application. This means that you needn't worry about LMI.
Though you do not have to provide any documentation in a no doc loan, you may have to sign some documents, including a statement containing your assets and liabilities and a declaration stating that you can repay your loan.
Some lenders tend to steer clear of no doc loans. And where lenders offer them, in such a situation, they will set their own terms and conditions.
On the other hand, no doc loans are an excellent option if you are in a financial position to make the repayments on this loan.
How Much Can I Borrow as a Contractor?
To begin with, your borrowing limit will primarily depend on your income, living expenses, the number of dependants and the status of your co-applicants.
With all documents organised, you can borrow up to 80 per cent of your property price without paying LMI.
However, some lenders may offer to loan you 90 per cent of your property price and LMI to cover their risk based on your loan. Some home buyers prefer to include their LMI premium into the loan amount. This helps them avoid making advance payments.
You could also leverage personal circumstances to improve your borrowing limit and get a better deal for contractors' home loans. These include:
Offering a Guarantee
Having a guarantor assures your lender that your loan will be paid off. For example, you could use your parents/siblings' property (in Australia) and their good credit rating as a guarantee to borrow more than 80 per cent of your property value.
Though lending criteria vary, your lender may want to see that your guarantor has significant equity in their home, usually at least 80 per cent, or must have full ownership of their home. Some lenders may want you to put a deposit of at least 5 per cent in genuine savings, despite having a guarantor.
Low Risk Profession
Doctors, dentists, legal professionals, and accountants are professionals considered low-risk borrowers and may qualify for an LMI waiver, subject to lending criteria.
Make the most of this option if you're a contractor in a low-risk profession. You can seek LMI waivers and, in some cases, special discounts on your home loans too.
How to Earn Approval on Your Home Loan Application
Save for a Larger Deposit
In principle, the more deposit you put down, the better your chances of becoming eligible for a home loan. Start saving well in advance to build up a significant deposit, as your lender will also be reviewing your saving habits.
Typically owner-occupiers should show anywhere between 5-10 per cent of the property price as a deposit, while investors need to save a 10 per cent deposit ideally. Or else, you will have to incur further expenses on paying LMI.
In addition, it is essential to remember that lenders will want to see that you have a good history of saving money.
Know Your Borrowing Capacity
Determining your borrowing capacity on your deposit amount, income, expenses, and other factors will provide a benchmark during house hunting.
Further, you may have to opt for a smaller home or a more affordable location by lowering your borrowing limits. However, this move may reassure your lender that you are borrowing within your limits, even if you were probably able to take a bigger loan. In such a situation, your lender may treat your application favourably.
Settle Pre Existing Debts
It's a good idea to settle your existing debts and pull back on unwarranted ones. Also, minimise your credit card expenses as much as possible.
Your lender will probably seek your recent bank statements when assessing your application. Therefore come across as a prudent spender by avoiding unnecessary expenses.
Know Your Credit Score Before Applying
Regardless of your employment status, having a good credit history improves your eligibility for a home loan on your contractor income. Banks and lenders thoroughly check your credit history when assessing your application. This gives them insights into your cash flow situation and your repayment capabilities.
Settling your unpaid debts and repaying dues on time support a good credit rating.
Find a Lender that Suits Your Financial Situation
When applying for a home loan, invest some time researching the terms and conditions of different lenders. This will help you identify lending institutions that understand your contractor roles.
You can shortlist mortgage providers willing to offer you a home loan at competitive rates. In addition, you may also get loan features that are provided on typical loans, such as offset, redraw facilities, and the ability to choose fixed or variable terms.
How Joust Can Help Contractors
Are you looking for home loans for contractors? Would you like more support to navigate the complexities of getting a home loan on your contractor income?
Our concierge services can help you connect with a team who will guide you through the process and find a customised solution with our trusted lenders.
Joust's transparent and competitive process will help you discover suitable home loan products based on your individual needs while potentially saving you thousands.