December 21, 2017
When you are self-employed, a mortgage refinance can seem like a daunting process. Despite the huge potential benefits – reduced costs, easier repayments and greater financial flexibility – the red tape that usually comes with applying for a home loan when you’re a self-employed borrower can deter many people from taking advantage of refinancing to a better loan.
As you probably already know from your experience when you applied for your current mortgage, you’ll need a hefty list of financial documents to help your lender verify your income when you are self-employed. You may have had to apply for a low doc home loan if you didn’t have the right income documentation – in which case, you’re probably paying a higher interest rate right now than what the more competitive mortgage products on the market offer.
Here’s the thing. Banks don’t dislike self-employed borrowers. They do, however, shy away from risk, even more since 2014 when Australia’s bank regulator, APRA, first started cracking down on lending criteria. A business owner or contractor who has a fluctuating income poses more risk than a conventional PAYG borrower. This is the case even if you have a high income.
Now, if you can offer the right documents, it is possible to still qualify for the best home loan products on the market. If you’re paying a high-interest rate now, for example if you currently have a low doc loan, you have even more incentive to switch to a better loan whilst rates are low. Even if you have a full doc loan, you may have plenty of other reasons to refinance, particularly as a self-employed individual who’s likely to have evolving financial needs.
Don’t avoid refinancing just because you are self-employed. Instead, be a better-prepared borrower when you go to refinance your home loan. By simply taking a few simple steps, you can be self-employed and refinance your home loan with flying colours. Here’s how.
Whether you work with a mortgage broker to help you find the right loan or do all the research and comparison yourself, the best way to find your ideal home loan is to know what you want out of the refinancing process. There are plenty of reasons why self-employed borrowers refinance:
- Switch to a lower interest rate
- Change the type of loan, such as to a line of credit loan or one with features that are ideal for a fluctuating income like free redraw and no penalty on early repayments
- Simplify your personal and business transactions with consolidating financial accounts
- Lower your repayments to make managing your finances easier
Next, it’s time to do your homework. Take a look at what loan products are available right now. Compare interest rates, as well as fees, features, and any special offers such as rebates for refinancing with a new bank. As a self-employed customer, you should also pay attention to a bank’s lending criteria. For example, do they have a strict lending policy or are they more willing to approach each customer as an individual? Do they have a low doc loan option if you are newly self-employed and won’t be able to supply the necessary documentation for a full doc loan?
When you are running a business, you know you have to weigh the costs against the potential gains of any business decision. The same goes for refinancing your mortgage. List all the fees you will have to pay to refinance with your top three choices. Pay attention to both one-time fees, like break fees if you have a fixed loan and loan establishment fees, as well as ongoing fees, such as a monthly account maintenance charge. Make sure refinancing falls within your budget and you understand how much it will cost you to switch to a new loan.
Before you apply, you’ll save a lot of hassle and stress if you prepare your documents beforehand. What do you need to apply to refinance when you are self-employed? As a rule of thumb, expect to be asked for the following documents for up to the past two years:
- Individual and business tax returns
- Business financial statements
- ATO notices of assessment
- Financial statements from your current home loan, savings account, credit cards and any other accounts you have with a financial institution
That’s it. As long as you have your paperwork ready, you can put in your application to refinance. A few weeks, or days depending on your lender and if you apply for a fast refinance, and you’ll have your loan approval letter in the mail if you qualify. All that’s left is moving on with repaying your refinanced mortgage, and taking advantage of all the perks that came with your new loan.
Written by Refinancing.com.au
Refinancing.com.au is an end-to-end service that helps people refinance their home loan. We empower you to search for your home loan, and choose the process that suits you.
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