From independent contractors to business owners, around 17.8% of the workforce in Australia is self-employed. With such a huge chunk of the workforce working for themselves rather than an employer, there are plenty of lenders who regularly issue mortgages to self-employed borrowers.
Find out what tips and insights you can apply to help you have the best experience possible as a self-employed borrower.
How Lenders View Self-Employed Borrowers
Self-employed borrowers are, as a whole, viewed as a higher risk than other borrowers. A lot of this is because of income instability. The reality is, most self-employed workers have a fluctuating income due to everything from the ups and downs of the business cycle to late payments by clients.
Without a stable income, lenders can’t predict your future income – and your ability to make loan repayments over the next 20 or 30 years – as accurately as they could with someone who earns the same amount of every month and has a contract with an employer.
This is why you may feel like you have to jump through hoops to get approved. If you are in certain industries that tend to have higher rates of default, like the construction industry, it may be even harder to qualify.
Don’t give up on home ownership because you are self-employed. There are a lot of options, a lot of good lenders to work with, and a lot of opportunities when you know where to look.
Call us on (07) 3146 5732 or fill out our online enquiry form today to talk with one of our specialists.
How Long Should You Be Self-Employed For?
When it comes to qualifying for a loan when you are self-employed, the more stability you can demonstrate, the more confidence the bank will have in you as a borrower.
One factor that shows you are likely to be a safe bet is simply having been self-employed for a few years. Ideally, you’ve been working for yourself for at least two or three years. You’ll have an easier time qualifying for an attractive self-employed loan if you have a long history in your current self-employed role.
What if You’re Self-Employed for a Year or Less?
You’ll have fewer lenders to choose from but you can still qualify for a self-employed home loan.
- For one to two years of self-employment, you can qualify as long as you are in the same line of work.
- For less than one year, you’ll probably need to apply with a lender that will consider your income for the last year you worked for your former employer.
If you are an attractive borrower because of other factors like a clean credit history and a robust net asset value, you may have a good chance of qualifying with a limited number of lenders, even if you have only been self-employed for a short time.
We can help you assess your situation. Contact us to talk to a mortgage broker who understands self-employed loans. Call us on (07) 3146 5732.
What Should You Watch Out for When Applying?
There’s something you should know as a self-employed borrower – your home loan application is likely more complicated than a traditional borrower’s! Because of this, there are a couple of things you need to look out for:
Common mistakes: The bank staff may simply not understand how to assess your income if there is a complex structure for your business. They also may focus too much on your income on paper without really looking at the impact of certain self-employed tax deductions like company car expenses.
Lack of efficiency: Sometimes self-employed home loan applications take longer for bank staff to assess. But, if there is a particularly long lag, it may simply be a case of procrastination – your application’s assessor may be putting off your more challenging application in favour of more straightforward, traditional loan applications.
In either case, your mortgage broker can step in to streamline the process. If we are concerned about mistakes, it’s simply a matter of talking to the assessor. If the application isn’t being looked at in a timely manner, it’s possible to request a different assessor to move things alone.
How Lenders Calculate Your Self-Employed Income
Generally, lenders will look at your past two years’ worth of tax returns to calculate what you earn and what you are likely to earn in the future.
Lenders use their own process for evaluating those two income amounts. But, as you likely have a different income from one year to the next, this could work in your favour or against it, depending on how much your two income years differ.
It’s important to understand that lenders determine your income in different ways. Depending on your unique situation, the way a lender approaches your tax returns could make or break your application.
For example, if you earned significantly less for one of the two years, but your lender only looks at your lowest earning year, you won’t end up with a lot of borrowing power and you may not qualify for the loan amount you want.
Here are some of the possible ways a lender may assess your income:
- Average your income from the last two years
- Take 120% of your lowest year’s income
- Only look at the lowest income amount from the last two years
- Use your most recent tax return and ignore the earlier one
Another factor to consider is how they treat your expenses. Some will add your expenses back into your income. Some won’t.
Because which income amount they look at matters so much, you may want to take a strategic approach to your application. You can decide which financial information will best serve your loan application. It’s possible you may be better off applying for a low doc loan and using your BAS statements, bank statements, and ATO tax portal printout from the last 6 months or year if these documents demonstrate a high turnover – but your income from two years ago would make it hard for you to qualify.
Choosing the right lender and the right approach can be complicated with self-employed loans simply because there are so many small variables that can make a big difference. This is why it’s more important to compare all your options and to choose the best avenues for your financial situation.
We can help you find a lender that will be a good fit for you. Contact us today to talk with a specialist.
How the Details of Your Tax Return Count
When you submit your application, the bank’s staff will check that your tax returns are signed and certified and align with your notices of assessment that you have filed with the ATO.
When it comes to business expenses as deductions – which lower your income on paper – most lenders will usually add back some expenses, such as a large one-off expense that isn’t likely to impact your income next year. Some will also add back other things like personal super contributions and asset depreciation.
While providing your recent tax returns and BAS or bank statements will serve to verify your income, your lender may also want to see other documentation to get a clearer idea of what you’ll earn in the future and how easily you’ll be able to manage your mortgage repayments, such as cash flow projections.
Will Lenders Expect the Most Recent Financial Year’s Tax Returns?
Depending on what month of the year you apply for a self-employed home loan, the last two years’ tax returns may or may not need to include your returns for the most recent financial year. Every lender has different criteria but, in general, if you apply later in the year, expect to submit your tax returns for the most recent financial year and the year before that. If you apply early in the year, you can use the two years prior – for example, if you apply in early 2019, you’ll submit your 2016 and 2017 returns.
There are lenders who are flexible and are willing to accept either or, regardless of when you apply. There are also some that will look at one year’s tax returns instead of two, which can be a lifesaver if you just started a business in the past couple of years and didn’t have a strong financial year for your first year in business.
For help finding a lender with more flexible criteria for self-employed borrowers, call one of our mortgage experts today on (07) 3146 5732.
How Do Lenders Treat Add-Backs for Self-Employed Loans?
When a lender looks at your tax returns, generally they will make adjustments to your taxable income called add-backs, as mentioned earlier. Remember, their objective is to determine your loan serviceability – your ability to repay your loan on time while also keeping up with your other financial commitments. When you are self-employed, you are likely to have a lot of business deductions to claim, which can reduce your taxable income significantly.
For example, what if you earned $100k but had a one-off business expense for $30k plus other deductions for operating costs totalling $15k, making your taxable income $55k? If your lender only assesses the $55k, you aren’t going to qualify for as much as you can actually afford, which sells you short as a borrower and limits the bank’s earning potential. In order to get a more accurate picture of how much debt you can service, they will add back in some of those deductions to make a better assessment of how much you can comfortably repay.
What Expenses Do Banks Add Back?
Each lender will have their own approach to what deductions to use but, in general, expenses that won’t regularly impact your spending power are potential add-backs.
Here are some of the most common examples:
- Business loan interest: You can deduct business and investment loan interest. Lenders will usually let you add this back to your income but they will still assess the loan as a financial commitment when they determine your serviceability.
- Extra personal super contributions: When you make contributions to superannuation beyond your minimum requirements, you can add back the deductions you claim.
- One-off expenses: Did you purchase a new piece of machinery or technology for your business last year and claim a deduction? Some lenders will let you add this expense back to your taxable income.
- Business car expenses: Deductions for a company vehicle aren’t added back like normal expenses because these costs are ongoing. Some lenders, however, will let you add back a standard amount.
- Depreciation: Some lenders will include this self-employed tax deduction because depreciation isn’t a normal, everyday operating cost.
There are other potential add-backs and other variations, which is why the lender you choose to apply with can have such a huge impact on how much you qualify for, and if you qualify at all, for a self-employed home loan.
Can I Apply for a Self-Employed Loan Without Submitting Tax Returns?
You can apply for a mortgage without your tax returns with a low doc loan. With a low doc loan, you still will need to provide some form of income verification such as your recent BAS statements, an official accountant’s letter and signed declaration of your income, as well as business bank or profit and loss statements. Your lender will also want to see that you’ve been operating under an active Australian Business Number (ABN) for at least the past six months.
But, a low doc loan is a practical alternative for self-employed borrowers who don’t have two years’ worth of tax returns ready.
There are a few factors to keep in mind with low doc loans:
- If you are borrowing more than 60% LVR, you’ll likely have to pay Lender’s Mortgage Insurance (LMI). With full doc loans, lenders don’t usually require LMI unless you are borrowing more than 80% LVR.
- It can be harder to refinance from a low doc loan to a traditional loan than it would be if you started off with a full doc loan. So, if you plan on refinancing in a few years, make sure you talk to a mortgage specialist about what your options may be in the future.
- Low doc loan interest rates aren’t as competitive as the best rates for full doc loans.
If you have any questions on low doc loans and the application process for self-employed borrowers, contact us today to speak with one of our mortgage experts. Call us today on (07) 3146 5732.
How Can I Qualify for a Self-Employed Home Loan?
When you are a self-employed borrower, you already have the bank’s perception of risk working against you because of income volatility. Even if you are a successful business owner, you still don’t offer the stability of an employee with a pre-determined salary and employment contract. So, you’ll want to be able to present yourself as a strong borrower in other ways when you apply for a self-employed home loan.
- Check your credit history to make sure you don’t have any errors. Ideally you won’t have any defaults or missed payments for the past 12 months at a minimum.
- How do your assets compare to your liabilities? Lenders want to see a large net asset position, which is an indicator of your financial strength. If you can pay off any debts before you apply, such as a car loan or a credit card, this will give your net assets a boost.
- With a large deposit, your lender will take on less risk when issuing you a loan. If you can contribute a larger deposit, this will improve your chances of qualifying for the loan you want.
How to Apply
When you are ready to apply, gather all your documents and figure out what your income will be. If you are applying for a full doc loan, you’ll need your tax returns as well as other documents. With a low doc loan, you’ll need your ABN, an official accountant’s letter and either your business banking statements or your BAS statements.
Research home loan products, comparing rates, features, and fees. Consider what you want from your loan – free redraw for financial flexibility, an offset account to help you pay down your loan faster?
Talk to the right financial professionals. You may want to have a conversation with your accountant, especially concerning your tax liability and how some deductions you claim could impact your ability to qualify for the home loan you want. To learn more about your loan options and for guidance throughout the process, contact the self-employed home loan specialists at Nexus Money today. You can fill out our online enquiry form or call us on (07) 3146 5732.