Home Loan Refinancing for the Self-Employed
Home loan refinancing in Australia hit record highs during 2023, as many mortgage holders took a proactive approach to combating inflated interest rates. This included both employed and self-employed individuals. But as a group, self-employed homeowners may be missing out on some great deals because of the challenges sometimes associated with self-employed refinancing.
Did you know that 61% of all Australian businesses are classified as self-employed? According to a June 2023 report by the Australian Small Business and Family Enterprise Ombudsman, there are now 1,550,151 self-employed businesses in Australia. That figure represents a significant portion of the Australian working population.
While being self-employed comes with some excellent perks (being your own boss, setting your own hours, working from home), it can also present some challenges, particularly when it comes to home loan refinancing.
How Important is Home Loan Refinancing?
Refinance home loan deals can potentially save you tens of thousands of dollars over the life of the loan. This is particularly the case for homeowners who have reached the end of their fixed interest rate term.
Once the fixed term ends, the average loan will automatically roll onto the lender’s standard variable rate. And this new variable rate is often substantially higher. This is why it’s so important to do routine “home loan health checks” to ensure you’re still getting a competitive interest rate.
What Are the Benefits of Refinancing a Home Loan?
Refinancing a home loan offers multiple advantages for homeowners. Some of these benefits include:
- Lower interest rates
Reducing overall interest costs and potentially lowering monthly repayments.
- Improved loan terms
Such as a longer repayment period or a switch from a variable to a fixed-rate loan.
- Debt consolidation
Combining multiple loans into a single, more manageable payment.
- Access to equity
Use equity to fund investment purchases or planned renovations.
- Greater financial flexibility
Adapt to changing financial circumstances (particularly useful for self-employed individuals with variable income).
Despite the obvious benefits, some self-employed homeowners hold off on home loan refinancing because of the challenges that can be involved.
What Are the Challenges of Self-Employed Refinancing?
Self employed refinancing deals can present some unique challenges. The four most common issues are:
Trouble verifying income
Self-employed individuals often find it more challenging to prove they have a stable income. Lenders will ask for detailed financial records to accurately assess your income.
Proving your business is stable
Self-employed borrowers may encounter challenges if they’ve only recently started operating or if they’ve experienced dramatic income fluctuations.
Insufficient equity
If the value of the loan you need to refinance is worth more than 80% of the total property value, then you may struggle to gain favourable loan terms. You could also end up paying Lenders Mortgage Insurance.
Higher interest rates and fees
Some lenders view self-employed applicants as higher-risk, so they will only offer a home loan refinance with less favourable terms.
The key to successfully overcoming these challenges is being prepared and getting the right advice.
How Can You Overcome Self-Employed Refinancing Challenges?
- Verifying your income
Make sure you’re fully up-to-date with all the paperwork for your business and personal finances. If you’re still concerned about proving your income, talk to a broker about whether a low-doc loan may be more suitable.
- Proving business stability
Demonstrate the stability of your business by providing detailed financial statements, tax returns, and BAS statements going back at least 2 years. Highlight any growth that the business has experienced (including any ongoing or recurring work contracts).
- Building your equity
Focus on building your equity. This could be achieved by making additional loan repayments or by investing in home improvements that will add immediate value.
- Use a broker to find the best refinancing deals
A broker can compare multiple loan products from a range of lenders. They’ll also identify which lenders are more favourable towards self-employed refinancing loans. Some mainstream lenders will use 1-year financials to work out your income standing alone, which means that if a business has grown, it is a fairer way to work out income moving forward than an average of 2 years, which can bring the income down.
Talk to a Mortgage Broker About Home Loan Refinancing When Self-Employed
Home loan refinancing may feel overwhelming when you’re self-employed. But it doesn’t have to. For expert advice on how to successfully refinance a home loan while self-employed, book an appointment with North Brisbane Home Loans.
Patrick Cranshaw, a Certified Mortgage Professional for over 21 years, founded North Brisbane Home Loans in 2002. His career began with ANZ Bank in New Zealand, where he progressed over 16 years to a Business Banking role in Virginia. After moving to Brisbane in 2000, Patrick led the QLD market for a home loan agency, helped set up the REMAX Real Estate Finance division, and practiced as a broker.
