Struggling to borrow while self-employed? A step-by-step guide to applying for a construction loan

Buy a section and build a brand-new dream house that perfectly matches your needs and aspirations, often for less than buying an existing home that may fall short of your expectations. Why not give it a try?

As with buying a home, you can borrow to buy land and build, or to add to or extend a house. These loans are known as construction loans. Anyone who has borrowed before will know that banks favour permanent employees who can provide evidence of a stable, long-term income. However, a substantial proportion of Chinese people in New Zealand have irregular incomes, including those who:

• Own and operate a business, or earn a salary through a company in which they are a shareholder;
• Work mainly on commission in industries such as real estate, insurance or mortgage broking, or vehicle sales;
• Work as contractors, with neither continuous work nor a steady income.

These groups can collectively be described as self-employed, sharing the characteristic of an irregular income. Does that make it difficult to obtain a loan? Frankly, people with irregular incomes do find borrowing somewhat harder than those on fixed salaries, mainly because their income structures are more complicated. Nevertheless, understanding the process and preparing thoroughly can still help you achieve your goal. Here, we explain how self-employed people can apply for a construction loan to build their ideal home. 

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What documents do self-employed applicants need?

Compared with salaried employees with stable incomes, self-employed applicants face somewhat stricter scrutiny from banks or specialist lenders because their income is less consistent. This does not mean they cannot obtain a loan.

When assessing a home loan, banks review the borrower’s income and debt levels, as well as the sources and stability of that income. If self-employed applicants can provide financial statements showing stable results over the past two years and evidence of declared income (Income Summary IR3), and meet the bank’s income and debt requirements, obtaining a loan can be relatively straightforward, just as it is for salaried employees with stable incomes,

whereas construction loans are somewhat more complicated. In addition to those financial statements and IR3, applicants need to prepare:

• Details of personal finances, including assets and liabilities
• Resource consent
• Building consent
• A fixed-price building contract
• A registered valuation report 

Will applying for the pandemic wage subsidy affect a loan application?

Given the impact of the pandemic in 2020, many businesses applied for wage subsidies during lockdown. When processing their loan applications, banks will place particular emphasis on obtaining additional explanatory information from the company. In particular, they will require an accountant to provide profit and loss statements for recent months to assess whether the business has returned to normal since lockdown ended.

How are construction loan lending ratios set?

Whether or not applicants are self-employed, banks set the loan-to-value ratio (LVR) for construction loans according to the project’s value on completion. Under current LVR policy, the ratio is 80% for owner-occupied homes and up to 70% for investment properties.

Specialist finance companies are another good option, particularly for small developers and clients with urgent short-term cash-flow needs. Their income requirements are less strict than banks’, and an experienced lending manager can sometimes arrange a lending ratio of up to 80%.

We recommend that self-employed applicants choose a professional lending adviser. This helps them assemble all the application documents quickly and efficiently, while the adviser’s years of client experience allow a personalised lending solution to be tailored to their financial circumstances and needs. The service is completely free for loan applicants, so why not use it?

Case study 1：

Mr Zhang owns a home on an 800-square-metre section and obtained building consent before the pandemic to add another standalone house. He has run a vehicle repair business for 2 years, with steady growth and an established customer base. During the pandemic lockdown, the company closed and stopped trading, and applied for the government’s wage subsidy, turnover and profit fell during this period. As New Zealand successfully brought the pandemic under control and industries gradually resumed operating, his business slowly returned to normal.

Mr Zhang wanted to borrow $500,000 so construction could begin as soon as possible. In October, he approached a bank himself for a construction loan but was declined, so he contacted Huarong Finance. Our mortgage adviser’s professional assessment quickly identified the key issue: the pandemic had affected his business, prompting stricter bank scrutiny and requiring a professional explanation and analysis,

Case study 2：

Mr Liu has worked in property development in New Zealand for 6 years. Pandemic lockdowns in 2020 delayed some projects and put pressure on his cash flow. As the pandemic eased, more of his projects were scheduled to launch. He approached Huarong Finance seeking NZ$2,600,000 so a project comprising 8 townhouses could get under way smoothly.

The mortgage adviser worked with the finance company, combining site visits, presales and debt restructuring to establish construction costs, then tailored a long-term loan to Mr Liu’s funding needs and development project. Drawing on Huarong’s extensive construction lending experience, the adviser also recommended increasing the loan to NZ$3,000,000 to allow for possible uncertainties during construction. Unexpected traffic control costs subsequently arose, fortunately, the extra $400,000 kept construction on schedule and avoided greater losses.

Case study 3：

Mr Wang works in vehicle sales and earns a base salary plus commission. His fluctuating commission and relatively low base salary had repeatedly prevented him from obtaining a bank loan.

After discussions with our Huarong Finance mortgage adviser, we tailored a lending solution for him. The bank could accept 100% of his base salary as income, with payslips or salary payment records from the past three months demonstrating its stability. For his commission, we asked him to provide IRD Income Summaries for the past two years and a letter from his employer confirming his consistent performance. We brought these documents together to present his income in the strongest possible way, submitting them alongside the adviser’s analysis of his financial position. Mr Wang’s loan was finally approved.

Huarong Finance has served Chinese clients in New Zealand’s mortgage market for fifteen years. We have always put clients’ interests first, drawing on extensive experience and a conscientious, responsible approach to secure the best outcomes for them. Our clients’ trust drives our growth, and we hope to continue growing alongside them over the next fifteen years and beyond.

For more information about applying for construction loans, please see  https://mp.weixin.qq.com/s/eu4fV7fX9yEk02tiCkDe9w

About the expert

York Zhang (Zhang Yong) 

Chairman, Huarong Finance

In 2006, York Zhang (Zhang Yong) founded Huarong Finance to provide Chinese clients with loans for homes, construction, businesses, land development, vehicles and heavy equipment. Combining his expertise as a mortgage broker with his personal experience of life in New Zealand, York hopes to use Huarong Finance to introduce more products suited to Chinese clients’ circumstances and needs, train more outstanding mortgage brokers, and release more equity from clients’ assets for reinvestment.