10 Tips to Get Approved for Home Loans for Contractors in Melbourne

The Melbourne housing market is one of the most vibrant in Australia. But if you’re an independent contractor or self-employed, you might find it harder to get home loan approval compared to those with regular PAYG jobs. 

However, it's far from impossible. With the right steps, guidance from experienced mortgage brokers, some industry know-how, and up-to-date documentation, you can get that home loan approval and secure the home you’ve been dreaming about. 

Let’s dive into everything you need to know about home loans for contractors and the 10 clear steps that will improve your chances of getting a mortgage as a contractor.

Understanding a Contractor’s Home Loan in Melbourne

A contractor’s home loan is designed for individuals who work on a contract basis rather than as full-time employees with a steady salary. In Melbourne and across Australia, contractors often face more hurdles when applying for a home loan due to their variable income and lack of a regular salary.

How Does a Contractor’s Home Loan Work?

While traditional home loans are generally assessed based on a person’s fixed monthly salary and long-term employment, contractors often need to provide extra documentation to prove their income stability. Instead of relying on payslips from a primary employer, contractors will usually need to provide:

• Tax returns (often from the past two years)
• Bank statements showing consistent income deposits
• A profit and loss statement for self-employed contractors
• Details of current contracts and previous work history
• Sometimes, a notice of assessment from the ATO

Key Differences from Standard Home Loans

1. Income Verification: Instead of relying on a simple payslip, contractors need to show their income history over time, proving that their earnings are stable, even if they fluctuate month-to-month.

Compared to traditional loans, lenders might ask for more documents, including detailed business bank statements and financial statements.

2. Deposit Requirements: Contractors are often seen as higher-risk borrowers, which means they may need to provide a larger deposit, typically 20% or more, to secure approval. PAYG employees might get approved with a smaller deposit, but contractors generally need to show more financial security upfront.

3. Loan Features: Contractors might be offered different loan features compared to PAYG employees. For example, lenders may suggest low-doc loans (which require fewer documents) or variable interest rate products that offer more flexibility.

Contractors might also benefit from loans with features like extra repayments and offset accounts, allowing them to reduce their mortgage quicker if their income fluctuates.

4. Higher Interest Rates: Because of the perceived risk in a contractor’s income, some lenders may offer slightly higher interest rates. However, with the help of a mortgage broker, contractors can still find competitive rates and loan packages tailored to their needs.

Types of Home Loans for Contractors

As a contractor, securing the right home loan can feel a bit overwhelming, but thankfully, there are various loan options specifically designed for your unique financial situation.

Let’s explore five common types of home loans available for contractors in Melbourne:

Low-Doc Home Loan

This loan type requires less documentation, making it ideal for contractors who may not have traditional payslips but can provide alternative proof of income, like tax returns and bank statements.

Variable Rate Home Loan

A variable interest rate loan offers flexibility, as your interest rate fluctuates with market changes. This is a popular choice for contractors who want the option to make extra repayments when income allows.

Fixed Rate Home Loan

With a fixed interest rate, your repayments stay the same for a set rate period, offering more stability—helpful for contractors who want certainty in their monthly budgeting.

Offset Home Loan

This offset loan lets you reduce your mortgage interest by linking a savings account to your loan. The balance in your account offsets the amount of interest you pay, which can be useful when your income streams are variable.

Interest-Only Home Loan

For contractors looking to manage cash flow, an interest-only loan allows you to pay only the interest for a set period, reducing your monthly repayments early on, though the principal will remain unpaid.

Melbourne Property Market 2024: Why It’s Perfect for Contractors Looking to Own Homes

In 2024, Melbourne remains one of Australia’s most sought-after property markets, particularly for contractors. With its diverse economy, high demand for skilled workers, and attractive property growth, Melbourne presents a prime opportunity for independent and self-employed contractors looking to secure homeownership.

Strong Job Market and Economic Growth

Melbourne has a thriving job market, especially in industries that attract contract workers, such as construction, IT, and professional services. These sectors often hire contractors on flexible short-term contracts or project-based work, allowing them to command competitive wages.

Melbourne’s ongoing infrastructure projects, like the Metro Tunnel and various housing developments, are boosting demand for construction contractors and skilled tradespeople (Infrastructure Victoria).

Steady Property Prices and Future Growth

The Melbourne property market is experiencing steady growth, making it a great time to invest. Despite economic fluctuations, Melbourne’s median house price remains strong. In 2024, the city is expected to see a property price increase of around 3-5%, according to data from CoreLogic.

For contractors, this means that securing property now could offer future capital growth, making it an excellent investment.

Flexible Loan Options for Contractors

Given the large number of contractors in Melbourne, many financial institutions offer low-doc home loans and tailored loan options specifically for contractors. With a strong track record of work and consistent income for contractors, lenders in Melbourne are becoming more familiar with and flexible with how they assess self-employed individuals.

10 Tips on How to Get Approved for a Contractor’s Home Loan

Now that you understand the Melbourne property market and why it’s a great time for contractors to secure a home, let’s dive into the practical steps. 

Getting approved for a contractor’s home loan can seem tricky, but with the right approach, you can improve your chances. Here are 10 essential tips to help contractors navigate the loan process and increase their chances of approval.

#1 Organise Your Tax Returns Early

If you're a contractor in Melbourne, the first thing a lender will look at is your tax returns. For self-employed individuals, these tax documents serve as the main way to demonstrate your earnings over time. Most lenders require at least two years’ worth of tax returns to get a good understanding of your financial situation. 

Make sure your notice of assessments is up-to-date, and if possible, have an accountant review your returns. Clean, accurate financial statements can give lenders confidence in your ability to make repayments.

#2 Keep Detailed Financial Statements

Lenders want to see a comprehensive picture of your financial history. Along with tax returns, they’ll require bank statements, business bank statements, and profit and loss statements for the last couple of years. 

Even if your income type varies month to month, detailed and consistent financial records can show lenders that your income is stable over a longer period. A lender may look beyond short-term fluctuations if they can see your income remains steady overall.

#3 Manage Your Credit Cards and Debt

Like traditional employees, contractors need a solid credit score to secure a home loan. But managing your credit cards, personal loans, and any other debt takes on even greater importance if you're self-employed. 

Lenders are cautious about risk, and any outstanding debts can reduce your borrowing capacity. Try to keep your financial commitments in check, and avoid maxing out your credit cards during the loan application process.

#4 Show Consistent Income Over Time

Contractors often have variable income, which means showing stability over time is crucial. Lenders will usually ask for several months (or even years) of business bank statements and income statements. 

The good news? Many lenders in Melbourne are familiar with contractors and self-employed workers.

If you can prove your income of contractors is reliable over a longer period of time, your chances of approval improve. This might include showing income from multiple streams of income, if you work across different projects.

#5 Be Ready with a Larger Deposit

Contractors are generally seen as higher-risk borrowers, which means you may need to provide a larger deposit than your PAYG counterparts. Aiming for a deposit of 20% or more will not only improve your borrowing capacity, but also help you avoid Lenders Mortgage Insurance (LMI), which can add thousands to your loan costs.

Higher deposits can show a lender that you're serious about buying a property and able to manage your finances well enough to save a significant amount.

#6 Get Your Loan Application Documents in Order

When you’re ready to apply, make sure you’ve got all the necessary documents. These might include:

• Tax returns (typically the last 2 years)
• Bank statements (personal and business accounts)
• Employment contracts or current contract details
• A clear profit and loss statement
• Evidence of rental income or any other sources of income

Having everything ready will make the loan process smoother and reduce your turnaround time for approval.

#7 Consider a Low-Doc Loan

A low-doc loan (low documentation loan) is a great option for contractors who may not have all the standard documents required for traditional loans. These loans are tailored for self-employed contractors or those with variable income.

You’ll need some financial statements, but they might not be as stringent as what’s required for a full-doc loan. Many lenders offer competitive rates on low-doc loans, but keep in mind that these rates can be slightly higher compared to standard loans, as the risk is perceived to be higher.

#8 Track Your Living Expenses

Lenders are required to assess your living expenses as part of the loan application process. Make sure you have a clear picture of your monthly bills, groceries, childcare costs, and other regular expenses. These numbers will help a lender gauge how much disposable income you have for your mortgage repayments.

In Melbourne, where living expenses can be higher than in regional areas, it’s crucial to be prepared. If you can keep your expenses in check, it will increase your borrowing limits and improve your chances of loan approval.

#9 Work with a Mortgage Broker

Getting advice from a mortgage broker such as LM Connect who specialises in contractors is one of the best ways to ensure success. A broker will know the variety of lenders in Melbourne who are more flexible when dealing with contractors. 

A broker can also help you navigate the sometimes-complex lending criteria that contractors face. They’ll help you find a type of loan with features like a variable interest rate, extra repayments, or offset accounts that suit your needs.

#10 Demonstrate Job Stability

While contractors don’t have a regular salary, showing consistent work can reassure lenders. Provide as much evidence as possible of past and current contracts, especially if you work in industries like construction or mining.

Even short-term contracts can help, as long as you can show a solid track record over time. Lenders may also look at your current role and whether your contract has the potential to be extended.

If you’ve had multiple contracts with the same primary employer, this may improve your case even more. Some lenders are also more open to contractors in high-demand fields, like construction contractors or mining contractors.

Case Study: John, the Melbourne Contractor

John, a construction contractor in Melbourne, wanted to buy his first home. Like many contractors, he had variable income and worked on short-term contracts. Unsure of his chances of getting a home loan, John reached out to LM Connect for help.

After reviewing his tax returns, employment contracts, and bank statements, LM Connect identified a lender who specialises in low-doc loans. With a strong application and some expert advice, John secured a home loan at a competitive rate within just a few weeks.

John’s key takeaway? Getting professional advice and preparing his financial documents early made all the difference.

FAQs

Can I get a home loan if I'm on a contract?

Yes, contractors can get home loans, but you’ll need to provide additional documentation like tax returns, bank statements, and proof of your contracts to show consistent income.

Is it harder to get a loan as a contractor?

It can be more challenging due to variable income and perceived risk, but many lenders offer tailored loan options specifically for contractors.

Can subcontractors get loans?

Yes, subcontractors can apply for home loans. Like contractors, you’ll need to provide proof of income stability and detailed financial statements.

How many payslips for a home loan?

For contractors, traditional payslips aren’t required. Instead, you’ll usually need at least two years of tax returns and bank statements to prove your income.

Do mortgage lenders look at your spending habits?

Yes, lenders will review your living expenses and spending patterns to assess how much you can afford in loan repayments.

How much can a contractor borrow for a home loan?

A contractor's borrowing capacity depends on your income history, contract stability, and the lender’s assessment of your financial records.

How much of a deposit do I need to make as a contractor?

Contractors generally need a deposit of at least 10-20%, but a larger deposit (20% or more) can help avoid Lenders Mortgage Insurance (LMI) and improve loan approval chances.

Final Thoughts

Getting approved for a home loan as a contractor in Melbourne is absolutely within reach with the right preparation and guidance. By staying organised with your financial documents and understanding what lenders are looking for, you can boost your chances of success. 

Ready to take the next step? Chat with LM Connect today at 0423 713 362 or visit LM Connect to find the best loan solutions for your needs.