Question
I am a self-employed builder and would like to purchase a property with my girlfriend who works part time as an employee and part time as a self-employed nail technician.
What is the maximum amount we can borrow if we are self-employed – is it different to salaried workers? Also, do we need to go to a specialist lender or are we able to access the same deals as others?
Darren’s answer
In terms of your income, self-employed borrowers can typically access the same income multiples (usually 4x to 4.5x income, sometimes 5x or even 6x in some cases) as employed applicants.
The main difference is the evidence you need to provide and how lenders evaluate your income. You’ll still have access to the same rates and deals as working borrowers.
Most lenders evaluate self-employed income differently, but borrowing power can be similar or even higher if structured well.
Lenders look at more than just your income when calculating how much you can borrow, such as:
income
Income is the starting point that determines maximum borrowing. This includes overtime, bonuses, commissions, benefits, etc. which can be a percentage and are usually averaged. Second jobs may also be considered.
Deposit size
This affects your loan-to-value (LTV) ratio which will determine the interest rate you get, and sometimes the amount you can borrow.
The lower the LTV, the lower the risk for the lender. A deposit doesn’t increase your income exponentially, but it can make lenders more willing to lend at the higher end.
Monthly expenses
Lenders calculate what you have left over after liabilities, which can include credit cards (even if paid monthly), loans, auto financing, student loan payments, child care costs, and maintenance or dependent payments. High regular liabilities can reduce your borrowing.
Credit history and score
Lenders will complete a credit check to look into missed or late payments, defaults, county court judgments, individual voluntary arrangements, or bankruptcies. They will also look at how much credit you use to prove your ability to repay your mortgage.
Stress test
Lenders test whether you can still afford the mortgage if interest rates rise.
Age and term of the mortgage
Your age affects the maximum term – it usually must end between 67 and 75 years old, depending on the lender. Higher monthly payments result in a shorter term, while lower monthly payments result in a longer term, making them more affordable
As you can see, there is a lot that goes into checking affordability.
It’s worth speaking to a broker who can do a Decision In Principle (DIP), which means the lender will check your affordability and credit score to give you an idea of the maximum you can borrow based on your circumstances.
