Those who work for themselves or run their own businesses have historically had to face unique challenges when it comes to qualifying for a home loan that other employment types do not. Due to the nature of fluctuation in business activity they often have unpredictable revenues and expenses, all of which is reflected in the financial documentation at the end of the year. This volatility and uncertainty of regular income presents to the banks as an additional risk of lending and therefore warrants more substantial forms of income verification.
As a general rule, lenders have historically required two years of financial information and documentation to evidence a consistency of income. However, this has become a tall order for many self-employed borrowers who have found themselves in volatile and uncertain financial situation stemming from the economic turmoil that ensued following the pandemic. Whether it was from the steep decline in demand or the proceeding credit crunch, many businesses saw sharp declines in their activity, from which they are still recovering. It takes time to build the businesses back up to full operating capabilities and even longer to get two years’ worth of income documentation to be able to qualify for a loan.
Banks have began to recognise that their serviceability tests for self-employed applicants are not reflective of their current or future incomes and have started to shift and adapt their policy offerings to cater for this reality. There are now more mainstream product offerings from banks which allow for servicing assessments to be based off of only a single year of financial income verification. Even lenders that still require two year’s history of business income are willing to take the most recent year’s income in full if satisfactory commentary can be provided to explain any discrepancy.
Another product offering that has been around for many years but has recently seen an uptick in consumption is the alternative documentation products or alt doc product as it is more commonly known. These products are not offered by the major banks but are key products amongst many of the non-bank lenders and enable borrowers to evidence their self-employed income without a full years’ worth a financial documentation. Acceptable forms of verification include business activity statements, business banking statements or even an accountants’ declaration letter, with borrowers being able to decide which form of verification they wish to provide to the lender.
The tradeoff of the using an alt doc product as you might expect is that the lender charges a higher interest rate for the loans as the cost of them taking on the additional risk. However, these products are suitable for borrowers to use to get into the market and once the business income can be evidenced through more traditional verification methods then the debt can be refinanced to cheaper lender. There is certainly a place for alt doc products that will suit the investment strategies of many borrowers as the high interest rate is only temporary until full financials can be produced to refinance the debt.
If you are self-employed and have seen volatility in your income over the past few years, there may options for you that allow to get into the market now and capture the rapid growth that is occurring. If you think that this could be an option for you then get in touch with your specialist investment finance broker to find out!