Are you self-employed and looking to borrow for your next home or investment property? Are you unsure of your borrowing capacity, or concerned the bank will not understand your financial statements? We are experts in helping self-employed clients and business owners succeed in home lending and securing them the best home loan deal possible. We work diligently to accurately understand and position your application in the strongest way possible to make sure it gets approved by the bank.
How do you help self-employed business owners with home loans?
We are experts in assisting self-employed business owners with home lending. Here’s how we help:
- We deeply understand how to read financial statements and interpret self-employed income
- We know how to look for and explain income add-backs and one-off expenses
- We know how to present your income to the bank so that you can borrow every dollar that you are entitled to
- We intimately know each bank’s self-employed income policies and when to apply them
- We work closely with your accountant to understand your financials and present your strongest application to the bank
- We manage the process for you to save you time and allow you to focus on your business
How long do I have to be in business to take out a home loan?
The bank would ideally like you to have run your business for 2 years, with 2 years ABN and GST registration.
There are exceptions to this where you are very experienced in your industry and can demonstrate that your income will grow or remain consistent upon starting your own business.
What other special considerations are there for self-employed business owners?
Unlike a salary, the income for self-employed clients is harder to predict and varies from year to year.
Most banks will aim to understand the consistency of this income by requesting your completed financials for the last 2 years. Completed financials means those which have been lodged with the ATO and your Notice of Assessment has been issued. Some lenders will only require or use your latest year’s income to determine loan servicing.
As this income is always historical, most banks have a time frame for which they will require your previous year’s financial statements to be finalised. This is usually January, February or March of every year that the latest year’s financials must be finalised.
What documents do i need to provide as a self-employed applicant?
The income verification documents for a self-employed client are different to that of a PAYG client. They mainly are your:
- Last 2 Years Company / Trust Tax Returns & Financial Reports
- Last 2 Years Individual Tax Returns & Notice of Assessments
The remaining documents will be the same as any other borrower, whether for an owner occupied property or investment.
Is it more difficult to obtain a home loan as a self-employed borrower?
No, it only takes an adviser that is experienced and comfortable with working with financial statements. If your broker has worked with many self-employed applicants and understands how to present your scenario, then there should be no issues.
How do you determine my borrowing capacity?
The principles of determining borrowing capacity are the same as for any type of client.
It is a case of understanding and determining your income and subtracting your living expenses and the repayments on your liabilities to derive your net income that can be used to repay a loan. The hard work in a self-employed scenario goes into understanding your income and picking the bank that will view it the most favourably.
What are the ways that my income is treated?
There are several ways that a bank can treat your income.
- They will use your latest year’s income
- They will average your last 2 year’s income
- They will take your lowest year’s income, where your latest year is lower than the previous year
- They will take 120% of the previous year’s income, where your latest year is higher than the previous year
The income calculation methodology that applies will depend on the bank that you select.
Can the profit in my business be added to the salary or directors fees I take to calculate my income?
Yes, we understand some clients earn more than they draw from their company as an income. Many successful owners choose to keep ‘retained earnings’ in their companies to continue reinvesting into the business or to minimise the tax they must pay. Where you 100% own your business or have a substantial shareholding, some banks will let you add the profits of the company to your own salary or directors’ fees from the company.
Where you have a minor shareholding, or the bank’s policies disallow, there are other lenders that will only accept for servicing the income you draw from the company and that ends up in your personal tax return.
Do the loans in my business affect my borrowing capacity?
Yes, loans within your business can reduce your borrowing capacity. Again, this depends on the bank that you pick. For some lenders, the repayments on your business loans must be factored into your serviceability. Other lenders will ignore them.
Does it matter if my income is earned from a company, trust or partnership?
No, we have expertise in interpreting income from all types of entities. The skill here is understanding the flow of income to understand your true borrowing capacity.
What is an example of a complex self-employed loan scenario?
Examples of a complex loan scenario include:
- Where there are multiple income earning entities, and not all of them are profitable
- Where income is received in multiple formats – salary, directors’ fees, dividends – and from different entities – companies, trusts.
- Where income has passed through multiple entities before finally being distributed to you
- Where income has been streamed to other beneficiaries that are not loan applicants, including corporate beneficiaries
- Where income has varied greatly from year to year and it is not clear why
- Where there are multiple shareholders or directors of the entity from which you draw an income
What if I have business partners, and my shareholding is split with other directors?
When there is a split shareholding, some lenders will apportion your share of the companies profits to your servicing, in addition to any PAYG income drawn.
Other lenders will only accept for servicing what you actually draw from the company in the form of salary, directors fees or dividends. This is lender dependent, and we will advise of the best option in our assessment of your scenario.
Are the rates any different if I am a business owner?
No, for normal full-doc lending, there is no difference in interest rates if you are approved for your loan. The rates will be the same as if you were a PAYG salaried employee.
Is the process any different if I am a business owner?
While the work is different to understand your income, and more experienced credit officers may assess your file, once your loan is submitted the loan process itself is the same as if you were a salaried employee.
What if my financials are not up to date at the time of application?
If your financials are not up to date at the time of application, you will need to urgently advise your accountant to complete them in order to achieve a formal loan approval. If you are unable to finalise your latest year’s financials, you may have to consider a specialist loan.