How to get a self-employed home loan
You might love the freedom of being self–employed but you probably don’t like the attitude of banks and lenders to self-employed loan applicants.
One of the main issues that you’ll face if you work for yourself is getting loans and mortgages on the same terms as ‘The Salaried People.’ You may even have been flatly refused because you are self-employed, which is frustrating at best and often devastating.
There are ways to increase your chances of getting a self–employed home loan. Australia has lots of providers that will offer favourable terms for tradies, ABN holders and other self-employed workers. You just need to know what you’re doing and be prepared to shop around on a trustworthy comparison site.
Do lenders like the self-employed?
Many lenders do see self-employed people and tradies as riskier because their income isn’t as stable as permanent full time employees.
Some lenders will also see some industries or trades as riskier still because they may have higher levels of defaults, so find out from an independent advisor which risk band you fall into and get as many documents as possible.
How long you’ve been self-employed is important
If you’ve been your own boss for less than a year, then you’ll almost certainly be turned down, so it may be best to wait and use the time to save a deposit. You won’t have any tax returns to show the lender and you’re not quite stabilised yet. It’s tough, but sensible.
Things ease up once you’ve been running for two or three years
Some mortgage lenders will approve you once you’ve been an ABN holder for two or three years and you have a couple of years’ worth of tax returns under your belt.
It helps a lot if you’ve started working for yourself in the same line of business as you were employed in previously and you can easily go back to it if your own enterprise falls over.
Watch out for these pitfalls and make sure your lender doesn’t fall into them
Some applications are turned down unfairly because the assessors make one of more of these common mistakes.
A lack of understanding or experience
You may have a complex company or trust structure, especially if you own or run more than a couple of enterprises. Some lenders’ staff don’t fully understand how to assess your income or don’t know if you’re using income protection insurance. If you’re not quite confident in your lender’s assessment, you might think about consulting your accountant about helping you explain things.
Your lender might count an income twice, or even an expense twice, which can skew your results.
They don’t count your company car
If you can tax-deduct your car expenses, then this is essentially additional income and so it’s money that helps to pay your home loan. Even if it’s just $1,000 a year, it should be taken into account.
Leaving you at the bottom of the pile
Not so much an error as assessors picking the low-hanging fruit (more straightforward applications) first. If you’re self-employed and have a more complex than average application, you should ask for an experienced or specialist assessor to deal with it.
How is my income actually assessed?
Lenders like predictability and patterns because by looking at your last few tax returns, they can estimate how stable your business and income will be in the next few years.
If your income has fallen or risen dramatically over the last couple of years then you could be on shaky ground – unless you have a good explanation, of course.
Some lenders work from your lowest income in the previous two or three years while others work out an average.
Find a lender that adds back expenses to your income
Adding back expenses makes a big difference to your loan application and the amount you can borrow. If you have Business Activity Statements or your Australian Taxation Office portal printout from myGov, then your lender can see why your profit for the previous year was lower than normal. Spending half of your turnover on upgrading your IT system is a very add-backable expense indeed.
What does the lender do with my tax returns?
The first thing that happens to your returns is that they’ll be checked to make sure they’re signed, certified and have notices of assessment so that there’s no doubt that these are your genuine tax returns.
Then, your taxable income will have expenses added back to get your final figure. These expenses could be one-off large ones, like the new IT system, or smaller and more regular ones like extra super contributions. If you’re making extra payments to your super, then this money could, in a tight year, be diverted to your mortgage instead. Ask if your lender looks at expenses like these.
Your bank or lender will also have different requirements depending on whether you’re a sole trader, a trust or a company. You may need cash flow projections or interim financial statements. Have as much information as possible available before it’s even asked for.
More about add backs
Your taxable income isn’t the same as your entire, actual income, so lenders look at how much you’ll have spare after your ongoing bills and other commitments, as well as any one-off expenses that won’t happen every month or year. They’ll also look at tax-deductible expenses and once these expenses are added back to your income, they can increase the amount you can borrow.
Examples of add back expenses
1) Depreciation of assets
As depreciation is a tax-deductible but not an everyday expense, some lenders will add it back.
2) Extra super contributions
If you made extra contributions to your super then these can also be added back because you don’t have to make them; you could just as easily pay the mortgage with them.
3) Net profit before tax
If some of your profits are retained within the company then they can be added back. If you’re a partner in the company, then your NPBT will be calculated proportionally.
4) Extraordinary expenses
If you have an unusual and large expense one year then it can often be added back, but you should have a letter from your accountant ready to go.
5) Interest on loans
If you have a business loan that involves tax-deductible interest then these amounts can be added back.
6) Trust distributions
If your business is in a discretionary trust and some of the income goes to family members then this can sometimes be added back. You may need your accountant to prove that the beneficiaries aren’t dependent on this income, though.
This can all get complicated, which is why it’s best to ask for an experienced assessor from the get–go!
Compare home loans from Australia’s banks, credit unions, building societies and non-bank lenders at InfoChoice.
The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.