Many self-employed people are in the struggle to get approved for a home loan, or they are not happy with the loan amount that their bank approved since Covid-19.

Well, applying for a home loan when you’re self-employed can be tricky. Specifically in this challenging time, many small businesses have been hit severely by the Covid-19 pandemic - their business performance has dropped in certain degree. Some of them have recovered or on the path to recovery, but their banks still said no, or significantly reduced their loan amount compared to the number they could have before.

In this video, we revealed three common reasons for self-employed people not getting approved for a home loan or not getting the ideal loan amount, and shared some tips on how you can jump through those extra hoops to get the better results.

Getting a home loan when you’re self-employed

Video Timeline

1. Three common reasons of banks not approving a home loan when you’re self-employed - - 01:08

2. Why self-employed home loan approval amount is reduced now? -- 05:09

1. Three common reasons of banks not approving a home loan when you’re self-employed

(1) You applied for the government assistance packages (e.g. wage subsidy, business loan)

Lenders have been declining home loan applications from applicants receiving New Zealand government help such as wage subsidy and business loan amid the Covid-19 pandemic.

The temporary wage subsidy scheme gives financial aid to the business that has experienced at least 40% of drop in revenue. From the perspective of banks, this indicates your business is in the struggle, specifically if you had the second tranche of wage subsidy. Consequently, banks are more likely to turn those self-employed borrowers away.

Good news is, if you had a business loan under the government help just in case of the rainy days, but you haven’t used it, we recommend you refund the business loan, which will help you get better results from the bank. But if you also had wage subsidy, it would make things hard.

(2) Your business has been trading less than a year                              

In the past, if you apply for a home loan when you just had been operating a business less than a year, it won’t make your home loan application too complicated. You could do a forecast and the bank would consider it.

However, the situation is becoming challenging now due to Covid-19. Many main banks won’t consider your deal if your business only has been trading for a few months. They prefer seeing enough trading records of your business.

Good news is, there are still some banks do consider if your business has traded only for close to a year such as nine months or a bit longer. In some worst-case scenarios when main banks said no or trading is less than 9 months, there are also primary non-bank lenders would consider your home loan application based on a number of things such as your accountant letter, your GST return, and bank transactions.

(3) Not dealing with the same bank that holds your business account

In the past, we would recommend our clients separate the bank that has a business account from their home loan bank. When you keep them all in one bank, you’ll lose the protection – should you experience any financial difficulties in the future, your bank will have control over your business cashflow, for example.

But considering the current environments, we would suggest self-employers apply for a home loan from the same bank. Banks prefer dealing with the application that self-employed borrowers have their business account with them as they can see everything easily.

To get around the approval issue, you could start with a home loan from your own bank, then refinance your mortgage to another bank once your business income becomes much stable.

2. Why self-employed home loan approval amount is reduced now?

If you're self-employed and your bank has approved your home loan application, but the loan amount is reduced (compared with the number that you could get before Covid-19). There are a couple of reasons that you potentially could get a better outcome.

(1) Self-employed income is shaded

For self-employed borrowers, banks are unlikely to take 100% of income into consideration. When banks assess the home loan applications, they shade the income to some percentage. The most common number we’ve been seeing is at least 15%. This is because:

Most New Zealand businesses have been hit severely due to the Covid-19 lockdown. Specifically during alert level 4, many businesses weren’t allowed to operate as normal. Alert 3 and 2 still have many restrictions, though it allows more commerce to reopen. This means if you’re self-employed, your bank will shade your income at the percentage to reflect the reduced business income. The percentage depends on their perception about how the lockdown has impacted your business.

The shading percentage can vary from one bank to another. Based on the same supporting docs and financial situation, bank A may shade 30% while bank B 15%. That’s why you may get different outcomes from different banks. We’re happy to have a look on your situation to find out the bank that is most suitable to you.

(2) If your 2020 financials are stronger than 2019’s

As a self-employed, you need to provide two years’ financial records for applying for a home loan from mainstream banks. Banks want to see your income to ensure you’re able to repay your loan. If your 2020 financial statement looks much stronger than 2019, they will average out your two years’ financial statements., therefore the averaged number will be less than if just looking at 2020 alone.

Don’t stress – approaching a primary non-bank lender can be a solution. They are still mortgage lenders providing long term home loan products but are not traditional New Zealand registered banks. When your bank said no or approved less amount, non-bank lenders may give you more lending options.

There are some primary non-bank lenders only requiring the latest year financials, which means they can potentially use more of your business income and approve more.

Although primary non-bank mortgage lenders often charge slightly higher interest rates – mainstream banks offer 2.49% while primary non-bank lenders offer sub 3% -4%. The rates are still affordable, and you’d better not to wait for another year and then the property has gone up in value.

Prosperity Finance – here to help

In a nutshell, one bank might be more suitable than another, depending on your situation and your needs. If your bank said no or not getting the loan approval that you expected, don’t worry it’s not all bad news – we’re happy to help and because we know what lenders are looking for, we’ll go in to bat for you. (We won't physically go in with a bat, but we have come close).

Call us at 09 930 8999 if you have any questions or would like to begin the process.

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Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.