Self-Employed Home Loans: How Lenders Look at Your Income

Why self-employed applications are different

An employee's income is verified with payslips and an employer. A self-employed borrower's income is verified with tax returns, notices of assessment and business financials, which look backwards and are often designed to show as little taxable profit as possible. Lenders also want to see that the business is established and stable. Most look for at least two years of trading under your ABN, though some will consider one year, especially if you were in the same industry as an employee beforehand.

Two years averaged, or the latest year on its own

Many lenders average your last two financial years. If your income has dropped, they'll often use the lower year instead. That works against you if your business has just had a breakthrough year. The good news is that some lenders will assess your most recent financial year in isolation when it's significantly stronger than the year before. That can lift your borrowing capacity substantially compared with an average. Lenders that do this usually want to see the improvement is sustainable, such as ongoing contracts, a growing client base or a consistent trading pattern since year end. Policies on this differ a lot, so it's one of the biggest reasons choosing the right lender matters for self-employed borrowers.

Add-backs: income that isn't really an expense

Your taxable profit isn't the only number a lender can use. Some expenses in your financials don't actually take cash out of the business, or won't continue once the loan settles. Lenders can add these back to your income. Common examples are depreciation, interest on loans that will be refinanced or paid off, genuine one-off expenses and, for directors, super contributions above the compulsory amount. Which add-backs a lender accepts varies, so it's worth having your accountant's financials ready to show them clearly.

Full doc or director wages only

There isn't one self-employed policy. Lenders offer several ways in, and the right one depends on how your business is set up and what your paperwork shows. Full doc is the standard path: two years of tax returns and financials, assessed on profit plus add-backs, with some lenders using the latest year on its own. If your latest return isn't lodged yet, some lenders will work from up-to-date financials and a letter from your accountant. If you're a company director who pays yourself a regular wage, some lenders will assess you on those director wages only, using your payslips or income statements much like an employee. That can be simpler and faster when the company's financials are complex or profits are being kept in the business.

Low doc: BAS and business bank statements

If your tax returns don't reflect how the business is trading now, or you haven't been going long enough to have them, low doc loans verify income a different way. Depending on the lender, that can be your business activity statements, your business bank statements over a set period or a declaration from your accountant. These loans are mostly offered by non-bank lenders and usually come with a higher rate and a lower maximum loan to value ratio, so they suit some situations better than others. For many borrowers they're a bridge, used until the full doc paperwork catches up and the loan can be refinanced to a sharper rate.

The tax minimisation trade-off

Keeping taxable income low is good for your tax bill and bad for your borrowing capacity. Lenders can only assess the income you declare. If you're planning to buy in the next year or two, talk to your accountant about the timing of expenses and how your returns will read to a lender. A small change in how the year is reported can make a real difference to what you can borrow, and it's much easier to plan before the financial year ends than to explain it afterwards.

What to have ready

• Your last two years of personal tax returns and notices of assessment.
• Business, company or trust tax returns and financial statements for the same years.
• Up-to-date financials and an accountant's letter if the latest return isn't lodged yet.
• Business activity statements for the current year.
• Details of any ATO debt and any payment arrangement in place.
• Your ABN and GST registration details, and how long you've been trading.

Questions, answered

Talk it through

General information only, so the next step is applying it to your numbers. Book a chat, email ugur@demir.loans or call 0495 000 228. Free, no obligation.