If you work as a contractor and you want finance to help you buy a home, the type of loan you need is a low doc loan. These loans don't require regular payslips or a full-time employment contract, making them suitable for those who work on a contract basis.
Why can't contractors apply for a regular home loan?
Lenders have to abide by responsible lending rules, which means they can't give a home loan to you unless they're sure you can afford the repayments. Borrowers who work on a contract basis are considered to have less secure employment than PAYG (pay-as-you-go) wage-earners.
Contractors don't get regular payslips and earn PAYG income, so the bank considers your application to be riskier. Instead of applying for a standard residential loan, you'll usually apply for a low doc loan, which requires less paperwork, but often comes with a higher interest rate.
You can still access a loan with many of the features you'd expect of a normal loan, such as an offset account, redraw facilities, and the ability to choose fixed or variable terms. You may be required to save a bigger deposit in order to qualify for a low doc loan; traditional loans may accept a 10% deposit, whereas low doc loans often require 20% or more.
Different types of contractors and home loans
1. Contractors who earn a PAYG income
This type of contractor typically has jobs that last for a short and fixed period of time, such as 6 to 12 months. The contract has a set date that the job ends or will roll over into a new contract or new job.
Often, they have benefits like annual leave and sick leave as well as automatically having taxes withheld and contributions to their super made.
If you are a PAYG contractor, your annual salary and any overtime (if proven to be regular) is "annualised". For instance, if you earn $90,000 for a 9-month contract, your income will be annualised as $120,000 per year.
Even if you earn PAYG income, home loans for contractors in this situation generally need to apply for a low doc loan, because your employment has a contracted end date.
2. Self-employed contractors
Sometimes, you may be self-employed but working as a contractor. In this case, you have registered with an ABN, and invoice your employer for wages and any other expenses you incur.
For instance, you might contract with a company for 6 months in a maternity leave position, and instead of joining the business as an employee, you work as a contractor paying an invoice every month.
Self-employed home loan borrowers must have registered an ABN for their current role at least 2 years prior to their loan application.
Self-employed contractors may have a less difficult time finding a loan, provided they have at least 2 years of income evidence to share. 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 more easily calculate how much they can afford each month.
Did you know?
Most mortgage brokers are actually self-employed contractors themselves, so they tend to know how to get the right product for this type of borrower. You need to apply to a lender that has policies and criteria that suit self-employed borrowers, which may not be a Big Four bank. If you're self-employed, consider working with a mortgage broker to give yourself the best chance of being approved.
3. Subcontractors
Subcontractors are unique in that you are employed by either the PAYG contractor or the self-employed contractor. The most common subcontractors are in industries like mining, trades and information technology.
If you are earning a high salary and there is a high demand for your job skills, you pose less risk to lenders, so may find it quite straightforward to qualify for a loan. The more income evidence you have to support your loan application, the better your chances of approval.
How to prove your income as a contractor applying for a home loan
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. Their goal is to make sure you earn more than you need to spend on your monthly bills, with enough left over that you won't be financially under pressure if you take on a home loan.
Overall, the bank wants a clear idea of:
How much you make
How much you spend
How much you can afford to pay on a loan
They will use information such as tax returns, bank statements and employment contracts to work this out. The more documentation you can provide as evidence of your income, the more reassured your bank will be about your financial position. From this point, the lender will consider whether the loan you’ve applied for is affordable for you, based on all of these figures.
Tips for contractors applying for a home loan
Use a home loan calculator. This will help you determine how much you can afford to borrow for your new home.
Save the biggest possible deposit. This will lower your risk in the lender's eyes, and give you a better chance of approval.
Keep tabs on your credit score. If you can show reliability with a strong credit score, this works in your favour.
Find a lender with contractor-friendly policies: Some lenders specialise in meeting the needs of self-employed and pay-as-you-go contractors.
Looking for income protection for contract workers?
If you're a contract worker, you may want to consider taking out income protection cover. Contract workers often won't have the same access to financial support such as paid leave from their organisation, in the event that they're seriously injured or become ill. Insurers have different requirements for contract workers, so it can be worth reviewing a few different options.
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To make sure you get accurate and helpful information, this guide has been edited by Joelle Grubb as part of our fact-checking process.
As an authority on all things personal finance, Sarah Megginson is passionate about helping you save money and make money. She is an editor and money expert with 20 years’ experience and an extensive background in property and finance journalism. Sarah holds ASIC RG146-compliant Tier 1 Generic Knowledge certification, and she's a regular media commentator, appearing weekly on TV (Sunrise, Channel 7 news, Nine news), radio (KIIS FM, Triple M, 3AW, 2GB, 6PR) and in digital and print media. See full bio
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Good morning. I approached my mortgage broker about my son getting a loan to buy a property with me. We have a decent deposit. The mortgage broker told me that subcontractors cannot get loans anymore under the new legislation. If they have no holiday pay, sick leave, do not work for an employer they cannot get loans, not even a car loan or personal loan ever. They will not be looked at and no lender in Australia will even look at him. Is this true?
Contractors can still obtain loans although these might come with extra conditions. I’d consider comparing loans and then speaking to a lender directly regarding this matter to find out what loans you might be able to take out.
I would recommend researching different loan products until you get one that suits how your son is paid, and then contact the lender to discuss your options.
I also recommend getting in touch with a licensed mortgage broker. A broker can help you understand your financial position and they can leverage their panel of networks to find a lender that is more inclined to review your application.
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Good morning. I approached my mortgage broker about my son getting a loan to buy a property with me. We have a decent deposit. The mortgage broker told me that subcontractors cannot get loans anymore under the new legislation. If they have no holiday pay, sick leave, do not work for an employer they cannot get loans, not even a car loan or personal loan ever. They will not be looked at and no lender in Australia will even look at him. Is this true?
Hi Pam,
thanks for the question.
Contractors can still obtain loans although these might come with extra conditions. I’d consider comparing loans and then speaking to a lender directly regarding this matter to find out what loans you might be able to take out.
I hope this helps,
Marc.
My son is a sub contractor lives in NSW wants to buy his first home a home & land package who would he be best to try for finance?
Hello Marcell,
Thanks for the question.
I would recommend researching different loan products until you get one that suits how your son is paid, and then contact the lender to discuss your options.
I also recommend getting in touch with a licensed mortgage broker. A broker can help you understand your financial position and they can leverage their panel of networks to find a lender that is more inclined to review your application.
I hope this helps,
Marc