Why self-employed borrowers are in danger of being left behind

Self employed home loan

According to the Ministry of Business, Innovation and Employment (MBIE), around 14% of the total workforce in NZ is made up of businesses with 0-2 employees. While self-employed Kiwis make a significant contribution to our economy, they are often excluded from getting a home loan or using the equity in their home to support their business. 

Non-bank lenders like Select are well placed to offer effective solutions for self-employed borrowers who might have the required cashflow and/or revenue to support an application for a home loan, but lack the financial statements (generally two years’ revenue averaged) required by many lenders to prove it.

Why is it so hard for self-employed borrowers to get approved by a major bank?

Self-employed borrowers in NZ face a number of challenges when it comes to getting a loan from the major banks. With credit criteria tightening across the market, clients who were previously considered ‘vanilla’ clients now fall out of that category and often find themselves locked out of home loans, even if they were able to get one in the past. Clients that are considered out of the box have little hope of even getting their application looked at, let alone approved. 

COVID-19 has further complicated an already challenging situation as many self-employed borrowers have had to rely on government subsidies and/or seen a reduction in turnover over the last 12 months. It’s difficult for banks to accurately assess a borrower’s ability to service a loan when they’re either looking at the average of the last two years’ financials, or the lowest. Given the two year timeframe for financials, this will continue to be a problem into FY22 and potentially FY23. 

How to improve the chances of getting a loan for your self-employed clients

Fortunately for self-employed borrowers, there are other options, if they’re prepared to look beyond the mainstream banks. 

There are a few things advisers can do to help their clients, whether they’re looking to buy a home or refinance and consolidate business debts, or take cashout using equity in their home to support their business. It all starts with understanding their client’s business – in particular anything in their financial records that might be considered a red flag by a lender. Once advisers educate themselves on the different options out there, and get to grips with how non-bank lenders assess applications, it’s more likely they will be able to find a loan that fits. 

What else can self-employed borrowers do to optimise their financial position and make it easier to get a loan in the future? 

Advisers may want to encourage their self-employed clients to seek advice from accountants and financial advisers, especially if they have experienced a downturn in their business due to the pandemic. This will help them understand their obligations and what they need to do to minimise any future issues either with tax obligations or their future cashflow. 

How does Select help self-employed borrowers?

Non-banks like Select offer more flexibility around their credit criteria and a range of products that are well suited to self-employed borrowers. With features like tax debt consolidation, cash out and only 12 months trading required, non-bank lenders offer a lifeline for self employed borrowers who want to get back on their financial feet or capitalise on a potential opportunity. 

Warning: This article is intended for mortgage advisers only and it is not to be distributed to anyone else, including consumers, under any circumstance.

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