Well, fundamentally you’re not, unfortunately the banks think you are and they can make it hard for you to obtain a Self Employed Home Loan, whether you are a sole trader, company, partnership or trust.
They require signed tax returns, notices of assessment and letters from your accountant and if you don’t have the latest two years available it can make applying for a self employed home loan incredibly difficult.
But not all banks have the same requirements for self-employed applicants looking for a self-employed home loan.
Self-Employed borrowers can choose from a wide selection of home loan types, such as:
How long must I be Self-Employed?
The vast majority of lenders require you to be self-employed for a minimum of two years, however some can consider people who have been self-employed for only one year!
What if I’ve been self-employed for one to two years?
We do have a lender on our panel who will accept people who have been self-employed for between one and two years, your business will need to be very similar if not exactly the same line of work you performed before you became self-employed and you will have to provide one year’s financials for the new business.
For example, you were previously full-time employed as an electrician and you have now started your own electrical contracting business, as long as you have been operating at least one year.
If you have been self-employed for greater than one year, speak to us today on 07 5593 1420 to find out how Ocean Home Loans mortgage brokers can get you approved for a self-employed home loan or self-employed investment loan, or enquire online and we will contact you as soon as possible to discuss your options.
So how is my income calculated?
If you were a permanent employee a bank would look at your most recent pay slips and know what you future income will be, for the self-employed when applying for a self-employed home loan most lenders will look at your previous 2 years of tax returns, profit & loss statements and balance sheets to assess what your income was and how stable your business will be in the future.
Banks like stability, if your income has varied greatly over the past 2 years they want to know why. For example:
- Only use the lower-income figure for the last two years
- Only use the most recent year’s income
- Use the average of the two years income
- If there has been a large increase in income from the previous year to the most recent year’s income only allow 120% of the lowest year’s income
- Allow or disallow certain expenses to be added back to the income on your tax returns
All of the above can have a significant impact on your borrowing capacity. Most importantly, all lenders interpret your tax returns differently.
What is an “add back”?
Your taxable income isn’t the same as your actual income that can be used to assess your capacity to meet your commitments, including the repayments for any new loans. Therefore some lenders add back any expenses incurred that reduced your taxable income.
By adding back expenses you can increase your assessable income and your borrowing capacity !
Some examples of add backs are:
- Depreciation: Depreciation is a tax deduction, however it is not a day-to-day cash expense. For this reason some lenders add it back to your taxable income but amount of allowance varies depending on nature of asset being depreciated. Assets with a high turnover may have a reduced amount of depreciation permitted as an add back by the lender.
- Additional superannuation: If you have made lump sum or regular voluntary super contributions in excess of your minimum statute requirements then these extra amounts can be added back in most cases.
- Net Profit Before Tax (NPBT): If you have profits that you have retained in your company then these can be taken into account as well, but only for the period on which the credit assessment is based. If you don’t own the entire company then lenders will assess your share of those retained profits.
- One off expenses: If you had an extraordinary expense then the lender will often add this back. An Accountant’s letter confirming this will be required.
- Interest & lease expenses: If you have a business loan or investment loan, then it is likely that you have tax deductions for the interest that you have paid. Lenders will add this back as they will assess all commitments that you have separately in their serviceability calculator.
- Rental property expenses: Depreciation on your properties, management fees, repairs and other rental property deductions such as negative gearing are all added back. Rental income is also deducted from your income as lenders assess this separately to your main income.
- Company car: If you have a car that is used by your business and yourself then it is likely that you have deducted many of the expenses associated with this car for tax. Lenders do not add this back, however they often will add back up to $6,000 in gross income to compensate for this if it is the sole vehicle within the family unit. Where a private vehicle is maintained within the family then no allowance will be considered.
- Trust distributions: If you have your business in a discretionary trust and have chosen to distribute income to some of your family members then in most cases this can be added back. Note that many lenders do not accept this add back, or will only do so if you provide a letter from your accountant to confirm that the beneficiaries are not financially dependent on this income.
Assessing which add backs can be applied and with which lender can be very complicated, this can result in reducing your borrowing capacity.
Ocean Home Loans mortgage brokers are experts in analysing self-employed financials, so If you have been self-employed for greater than two years and have your financials up to date, speak to us today on 07 5593 1420 to find out how Ocean Home Loans mortgage brokers can get you approved for a self-employed home loan or self-employed investment loan, or enquire online and we will contact you as soon as possible to discuss your options.
What documents do I have to provide?
Again, all banks & lenders have their own individual requirements, but any or all of the following could be required:
- Signed Tax returns
- Accountant prepared Profit & Loss statement & Balance Sheet
- Tax assessment notices
- Business Activity Statements (BAS)
- Australian Taxation Office (ATO) tax portal printout
- Business bank account statements for the previous three to six months showing your turnover
What if my financials aren’t up to date?
Most lenders these days will allow you to not submit tax returns or financials if you sign a declaration confirming your income, the lender will then assess your self-employed home loan using the declared income.
They may also require Business Activity Statements (BAS), Business bank account statements or a letter from your accountant confirming your income
This can also depend on whether you are borrowing less or greater than 60% LVR of the property’s value. Generally, the lower the LVR the less documents required by the lender.
You will have to pay for Lenders Mortgage Insurance (LMI) as a one-off fee when the loan is set up for loans over 60% LVR of the property value.
For more information see our low doc home loans page, Ocean Home Loans mortgage brokers will help you find a great lender & competitive Self Employed Home Loan package. Speak to us today on 07 5593 1420.
Ready to Apply for a Self Employed Home Loan?
Ocean Home Loans mortgage brokers are experts in analysing self-employed financials, so If you have been self-employed for greater than two years and have your financials up to date, speak to us today on 07 5593 1420 to find out how Ocean Home Loans mortgage brokers can get you approved for a self-employed home loan or self-employed investment loan, or enquire online and we will contact you as soon as possible to discuss your options.
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