Securing a mortgage if you are self-employed
Did you know that approximately 21,000 new businesses a started up each year in Australia and there are over 2 million actively running? Home loans for the self-employed is becoming more important everyday as the number of small and medium sized businesses are increasing.
Banks are continuously changing and tightening their policies, so it’s no wonder that self-employed loans can seem daunting and unclear. Each lender has their own set of policies – or rules if you want to call it that – and so navigating the variances from one to the next can be time consuming and can even cause irreversible damage to your credit rating.
Experience has shown me that with a little understanding and education, we can often place even the most seemingly difficult applications.
What are some things you need to consider as a self-employed borrower?
Know your numbers
It goes without saying that knowing your income thoroughly can make a big difference to your application. Lenders will look at your income and expenses, but did you know there are also possible income add-backs? For example, large one-off expenses, depreciation and interest on debts already declared are just some – but some lenders can take this a little further with a good back story and the relevant evidence to back your claims.
Knowing your numbers upfront can help you choose a lender that is favorable to your circumstance, including if you are considering a low-doc style application, as each lender assesses low-doc income with difference documents and over different periods of time.
The minimum gold standard for self-employed home loans is two years ABN history, two years GST registration and two full years tax returns and matching notice of assessments – so being in business over two years can make things much easier. If you’ve been in business for a few years and the most recent year has been low, then you could have to wait until you can show 2 good years.
On the other hand there are lenders that can consider just the most recent years tax return, lenders that may consider low-doc loans using anything from your most recent BAS, business account trading statements, a letter from your accountant and a few other possible items that can help verify your income outside of the 2 year requirement. There are even lenders that can consider 6-12 months in a new business.
Ready to start planning your self-employed home loan? Contact us here for a no obligation chat!
Lodge your returns
Ensuing you lodge your tax returns at the end of each year not only helps you keep track of the numbers, but makes applying for a home loan so much easier. It seems obvious, but many business owners will delay their tax returns in-order to put off paying tax until sometime in the future. Then, when it comes time to get your home you suddenly have to wait often months to have everything completed and ready only to find out the income is not quite what you hopped. Lodging your returns earlier on means that you can plan much further in advance and know what you may be capable of borrowing.
This is often the strategy for many business owners – claim everything you can and pay as little tax as possible – after-all, that’s why you pay your accountant the big bucks – to reduce your tax, right?
As wonderful as this may be when it comes to reducing tax, it can hurt your borrowing capacity. I’m not suggesting here that you don’t report all your income and expenses, but all those items you’re claiming that may not really be a true business expense could be doing more damage to your plans – additionally, those cash jobs that get missed from your tax return are reducing the income that the lender can use to assess your borrowing power.
There are options
The underlying message here is that there are options, but the more prepared you are the better those options will be. Creating a strategy earlier on is key and understanding your financials, or at least having a clear set provided from your account will go a long way to making the journey easier.
It’s never too early to start a conversation with a mortgage broker as our goal is to make sure you have the right information well in advance, so you can plan for the future. Get in touch with Emanate Finance today for an obligation free chat and to set a plan in place.