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Home loans for contract employees
Getting a home loan for contract employees is a little different than getting a regular loan – here's what you need to know.
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When searching for a home loan, contract employees need to look for low-doc loans. This is because contractors who don't get regular payslips struggle to provide the proof of income required for a traditional loan.
Lenders have to align with responsible lending rules, which mean they can't give a home loan to someone unless they're sure you can afford the repayments. Because of this, borrowers who work on a contract basis are considered to have employment that is a little less secure than PAYG wage-earners. This can impact your ability to get a loan.
Contractors and home loans
Pay As You Go
This type of contractor typically has jobs that last for a short and fixed period of time. Their contract will have a set date that the job ends or will roll over into a new contract or new job. Sometimes they have benefits like holiday pay and sick leave as well as automatically having taxes withheld and contributions to their super made. It tends to be more difficult for the PAYG to get loans because their income is the most difficult to track. However, with the right lender someone who works pay as you go can get approval for a mortgage. It is very important to shop around to make sure that you get the best rates and terms available, regardless of your PAYG status.
If you are a Pay As You Go applicant, your salary per annum is analyzed, along with overtime pay. The overtime pay, however, must be proven to be a regular occurrence. If you do shift work, that to will be allowed, but once again, you must prove that this is typical of your employment and not just a one-time occurrence. If you receive Centrelink payments, they will be considered as income. However, the loan will dictate that the children involved are eligible for Centrelink for 3 years into the loan. Therefore, income from children 15 years old or older will not be considered.
Unlike PAYG, these contractors do not typically have benefits from the company with whom they work. They are traders themselves who register with ABN and invoice their employer for wages and any other expenses which they incur. These contractors have a less difficult time finding lenders willing to take a chance on them. Because they can track their employment just like any other self employed person they can prove that they have regular income and the lender can easily calculate how much they can afford each month. Most mortgage brokers are actually self employed contractors themselves, so they tend to know exactly how to get the right product for this type of worker. Self-employed contractors must a registered ABN for their current role two years prior to loan application.
The subcontractor is unique in that he or she is employed by either the PAYG contractor or the self employed contractor. The most common subcontractors are in the areas of mining and information technology. Since it is well known that miners make excellent salaries and can easily find work they can usually get an approval without much hassle. Likewise, information technology workers tend to earn high salaries and there is a high demand for their job skills so they pose little risk to lenders.
When your income is firmly established, whether you are PAYG or self employed, your lender will balance your income with your expenses. These will include monthly bills for which you receive statements. Cost of living and HECS are also considered in these calculations. Your lender has several options in considering your estimated cost of living, which will include, among other things, utilities, clothes, loans and insurance policies. The Bureau of Statistics has established the Henderson Poverty Line, which is used by some lenders to determine what your cost of living will be. Other lenders will use their own standards.
Now the bank has a clear image of how much you make, how much you spend and how much you can afford to pay on a loan. From this point, the lender will consider the impact of the loan for which you’ve applied on all of these figures.
Once all of these calculations have been made, the grand total is subtracted from your income. The amount of cash remaining must be enough to make regular payments on the loan.
Tips to give yourself the best chance of approval
- Use a home loan calculator to determine how much you can afford on your new home
- Work hard to save for your deposit. Showing your lender a strong deposit will give you a better chance of approval. Aim for about 25% of the purchase value.
- Show reliability with your credit score.
- Be honest in your application. Lenders will look very poorly on your application if they discover a loan on your credit file that you neglected to tell them about.
- Compare a range of different lenders willing to lend to low-doc borrowers. Most major banks have specialists who deal exclusively with the needs of both self employed and pay as you go contractors.
- Look for a mortgage that offers features like interest-only, fixed rates, offset at one hundred percent, redraw and extra repayments. Just because you are a contract worker does not mean your mortgage should be short on valuable features.
Looking for income protection for contract workers?
If your a contract worker looking to keep your income secure, you may want to look into taking out income protection cover. Contract workers often won't have the same if any financial support from their organisation in the event that they are seriously injured or become ill while overseas. Insurers will have different entry requirements for contract workers so it can be worth looking at a few different options. An insurance consultant can discuss the different options available to you and provide a quote from a range of insurers free of charge.
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