Securing a Mortgage When Self-Employed

Did you know that approximately 21,000 new businesses are started up each year in Australia and there are over 2 million actively running? Home loans for the self-employed are becoming more important every day as the number of small and medium-sized businesses increases.

Banks are continuously changing and tightening their policies, so it is no wonder that self-employed loans can seem daunting and unclear. Each lender has its own set of policies – or rules – and navigating the variances from one to the next can be time-consuming and can even cause damage to a credit rating.

Experience shows that with a little understanding and education, even the most seemingly difficult applications can often be placed.

**What to consider as a self-employed borrower**

**Know your numbers**

Knowing income thoroughly can make a big difference to an application. Lenders look at income and expenses, but there are also possible income add-backs. For example, large one-off expenses, depreciation, and interest on debts already declared are a few. Some lenders may take this further with a clear explanation and relevant evidence to support the figures.

Knowing numbers upfront helps in choosing a lender that is favourable to specific circumstances, including if a low-doc style application is being considered, as each lender assesses low-doc income with different documents and over different periods of time.

**Time helps**

The minimum gold standard for self-employed home loans is two years of ABN history, two years of GST registration, and two full years of tax returns with matching notices of assessment. Being in business over two years can make the process much easier. If a business has operated for a few years and the most recent year has been low, it may be necessary to wait until two strong years can be shown.

On the other hand, there are lenders that can consider just the most recent year's tax return, as well as lenders that may consider low-doc loans using a recent BAS, business account trading statements, an accountant's letter, or other items to verify income outside the two-year requirement. Certain lenders may even consider 6 to 12 months in a new business.

**Lodge your returns**

Ensuring tax returns are lodged at the end of each financial year not only helps track numbers, but also makes applying for a home loan much easier. Many business owners delay tax returns in order to put off paying tax. When it comes time to apply for a mortgage, this can lead to delays of several months while documents are completed, only to reveal that income is not what was hoped. Lodging returns early allows for planning further in advance to understand potential borrowing capacity.

**Claiming expenses**

A common strategy for many business owners is to claim as many expenses as possible to reduce taxable income. While this reduces tax liabilities, it can reduce borrowing capacity. Claiming items that are not true business expenses or omitting cash income can reduce the assessable income that lenders use to determine borrowing power.

**There are options**

There are options available, but preparation leads to better outcomes. Creating a strategy early and understanding financial statements—or obtaining a clear set from an accountant—helps simplify the process.

Engaging a mortgage broker early ensures that relevant information is available well in advance, helping self-employed borrowers plan for the future.