Home loan secrets for the self employed

Banks just love to make it hard for anyone with a business to borrow money!

They want tax returns, notices of assessment and then letters from your accountant, making applying for a loan incredibly difficult.

Luckily, not every bank has the same requirements for the self employed!


How long do I need to be self employed for?

To get a self employed home loan, the majority of lenders require you to be self employed for at least two to three years, however some can consider people who have been self employed for only one year!

If you’ve been self-employed for one year or more, speak to us today on 1300 889 743 or fill in our free assessment form to find out how you can get approved for a mortgage.


What if I’ve been self-employed for less than a year?

If you’ve been self employed for less than one year, then unfortunately there aren’t many options. Most banks won’t lend to you because you don’t yet have tax returns to prove your income and because new businesses have more financial uncertainty.

One of our lenders can look at your income from your last job and take that as proof that you can afford the loan.

The reasoning behind this is that if you decided to close your business you could always return to working for someone else on a similar salary. On that basis we can help you borrow up to 80% of the property value.


What if I’ve been self-employed for one to two years?

One of our lenders can approve loans for people who have been self employed for between one and two years as long as they have been in the same line of work for some time and have at least one year’s financials for the new business.

A good example of someone we can help would be a plumber with his own business, who has been operating one year, who was previously employed as a plumber for five years.

If you’re concerned that your employment situation may make you ineligible for a home loan, please call us on 1300 889 743 or fill in our free assessment form. We specialise in helping self-employed people get mortgages with great rates!


What mistakes do banks often make?

We often see mistakes in the way that the banks calculate the income for self employed borrowers.

For complex loans we make extensive notes, and if need be, call the assessor and walk them through the financials to ensure that they assess the loan correctly.

The most common mistakes we see are:

  • Lack of understanding: Complex trust structures with multiple companies and trusts are often handled by bank staff that lack the experience to understand what’s actually happening with your income or if you’re using income protection payments. In these cases, we’d talk to your accountant and then talk to the assessor to ensure they understand exactly what’s going on.
  • Double dipping: This is where the lender takes an income into account twice (e.g. Net Profit Before Tax and also accepting the dividend paid to a director) or takes an expense into account twice (e.g. forgetting to add back interest on loans).
  • Company car: Lenders regularly ignore the benefit a self employed person receives from tax deducting their car expenses in their company. We always draw their attention to this in our notes.
  • Procrastination: Technically this isn’t an error as it’s done on purpose! If your loan is particularly complicated then we find that bank staff may take their time to get to your application. We usually speak to management and ask them to assign your loan to an experienced assessor who will enjoy the challenge of a complicated application.

How do lenders calculate my income?

Most lenders believe that by looking at your past tax returns they can predict how stable your business will be in the future.

Banks and non-bank lenders alike tend to be very wary if you have an income that has increased or decreased by a large amount in the last two years.

  • One lender may use the lowest of the income figures for the last two years.
  • Another may use the most recent year’s income as shown on your tax return.
  • Some may even average the two years income or take 120% of the lowest year’s income.
  • They may or may not then add back expenses shown on your returns.

As you can imagine this makes a big difference to your loan application! Importantly, every lender will interpret your tax returns in a different way and may look at your skills as an entrepreneur, your experience in the industry and the risk profile of your industry to determine how to assess your income.

Depending on your situation, we may pick and choose which information to provide to help prove the highest possible income. If you can provide them, then we may ask for Business Activity Statements (BAS), An Australian Taxation Office (ATO) tax portal printout or bank account statements for the last three to six months showing your turnover.

We specialise in finding the lender that will look at your documents most favourably!

Please contact us on 1300 889 743 or fill in our free assessment form and we can help you find the right lender who will assess your income in the best possible way!


What do lenders think?

Lenders have the view that self employed borrowers represent a higher risk because their income isn’t as stable.

Some banks even view those in the construction industry less favourably then those from accounting firms. This is simply because banks have seen higher levels of default over the years from particular industries so tend to be more conservative when lending to them.

At one time, a leading mortgage insurer even refused to approve low doc loans for builders!

As you can see, the banks complete a more thorough assessment of applications from business owners.

Luckily we can help!

Unlike most major banks, we know that there are also hundreds of thousands of businesses Australia wide that have been trading profitably for years.

It just isn’t fair to paint them all with the same brush!

We know which lenders treat self-employed people more favourably. Contact us on 1300 889 743 or fill in our free assessment form for expert advice on your loan!


How will lenders view my tax returns?

When a credit officer working for a bank receives your tax returns on his desk he’ll check to make sure they’re signed and certified and backed up by notices of assessment. This is a simple fraud check to make sure that these are the tax returns you lodged with the ATO.

Next, he’ll usually look at the last two year’s taxable incomes and add back any unusual expenses such as one off losses.

Did you know some lenders will add back extra super contributions and even depreciation?

This is where the banks really show a large difference in the way they read your tax returns! Banks will also have different documentation requirements depending on if you’re a company, trust, partnership or sole trader. They may ask for interim financials or cash flow projections, depending on the nature of your business and risk of your application.

To find out more, or to speak to one of our expert mortgage brokers about applying for a home loan, please contact us on 1300 889 743 or complete our free assessment form.


How recent are your tax returns?

By March or April each year most lenders begin to ask for tax returns for the most recently completed financial year. Up until that point you can provide the tax returns from the year before!

So, for example, if you applied in January 2015 most lenders would require your tax returns for 2012 and 2013, however in March 2015 most lenders would require 2013 and 2014 returns.

Of course there are always exceptions! One of our lenders can accept older tax returns as an exception to their normal policy. This is useful for people who haven’t had a chance to lodge their most recent return.

One of our other lenders only requires one years’ tax returns. This is useful for people who have had a bad year the year before or who only recently started their business.


What is an “add back”?

Your taxable income alone isn’t the same as your actual income that you can use to pay your commitments, including the repayments for the new mortgage. So lenders add back any expenses that you’ve incurred that reduced your taxable income, however aren’t a “real” expense or ongoing commitment.

By adding back expenses you can increase your assessable income and your borrowing power!

Some examples of add backs are:

  • Depreciation: Depreciation is a tax deduction however isn’t a day to day expense. For this reason, some lenders add it back to your taxable income.
  • Additional superannuation: If you’ve made lump sum contributions to super in excess of your minimum requirements then these can be added back.
  • Net Profit Before Tax (NPBT): If you have profits that you’ve retained in your company then these can be taken into account as well. If you don’t own the entire company then lenders will assess your share of the net profit.
  • One off expenses: If you had an extraordinary expense then we can often add this back. We may need an accountant letter to confirm this.
  • Interest expenses: If you have a business loan or investment loan then it’s likely that you have tax deducted the interest that you have paid. We can add this back as lenders 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. Rent income is also deducted from your income as lenders assess this separately to your main income.
  • Company car: If you have a car that’s used by your business and yourself then it’s likely that you have tax deducted many of the expenses associated with this car. Lenders don’t add this back, however they’ll often add in an extra $3,000 to $6,000 in income to compensate for this.
  • 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 don’t accept this add back, or will only do so if you provide a letter from your accountant to confirm that the beneficiaries aren’t financially dependent on this income.

As you can see, this can get quite complicated! As a result many bank employees make mistakes when assessing your income.


Low doc options

Most lenders these days will allow you to not submit tax returns or financials if you sign a declaration confirming your income.

The lender can then assess your loan using the declared income.

Although most lenders don’t charge a higher rate for low doc loans they may charge you Lenders Mortgage Insurance (LMI) as a one off fee when the loan is set up.

This fee is usually charged for loans over 60% of the property value.

For more information see our low doc home loans section, our alternative income verification page, or complete our free assessment form. Our mortgage brokers will help you find a great lender & competitive loan package. Speak to us today on 1300 889 743!


Avoid business banking

If you’re borrowing in a company, trust or partnership then you may get referred to business banking. Avoid this at all costs!

If you have a residential property as security then why should you pay a higher rate and higher fees just because you’re borrowing in a company? Your loan may be a business loan, however the risk to the lender isn’t any higher than for a standard mortgage!

Some of our lenders will approve company home loans and trust home loans at standard residential rates.

You may have to pay slightly higher fees so that the lender can draw up more extensive loan documents which encompass a personal guarantee from the directors.

For more information or to apply for a loan, please contact us today on 1300 889 743 or complete our free assessment form. We can help you get approval!


Apply for a home loan

If you’re self-employed and looking to get finance, please speak to us!

However, keep in mind that it’s best to apply for a home or investment loan when you feel your business is stable.

This is something that both us and the bank can’t assess, you’d need to determine this for yourself.

Talk to us on 1300 889 743 or complete our free assessment form to obtain a quote from a lender that will be best suit your situation.

  • Tonie

    Hi, I’m a self-employed carpenter and want to buy an investment property in Salisbury, QLD. I want to know how the banks calculate the income, since I was on loss the last year due to life-event and I couldn’t give enough time to my business. However, it has been recovered and this year, I’ve expected income to be 85k, so please anyone suggest me which one will the bank use as my net income?

  • Hi Tonie,

    Most lenders usually require two year financials and tax returns to establish a consistent income, however there are some lenders that can go by one years tax returns.

    If you don’t have your latest tax return after the business has started doing well, there are some lenders that can still help you based on the income that can be proved by one or all of the following: Business Activity Statement, Business Transaction Statements, Accountant Declaration.

    Moreover, some lenders calculate the average income of 2 financial years, some other use the lowest one while some other use the recent one, so we as a mortgage broker will assist you to find that particular lender which views your documents most generously.

  • Elissa Jenkins

    Heya. I have been a freelancer for 1 year 6 months. I am full-time. My husband has run his business for 4 years. He is part-time. Like any business, we’re always being encouraged to write off as many expenses as possible in any given financial year to minimise our tax. In applying for a loan, will a bank manager look at our gross income (before expenses) or our net profit (after expenses)? I know when you are salaried, they look at your gross income. Is it the same when self employed? Thank you.

  • Hey Elissa,

    It’s actually a tough one to answer, it depends on many factors.

    If you contract to one main company and just provide your labour we can have you assessed as PAYG which means approx 46 weeks income can be used less any GST you charge. This is to allow for annual leave and sick leave.

    There’s also low doc options that include BAS statements, bank account statements or an accountant’s declaration as alternative methods of verifying your income. The rates on these are actually quite low at the moment, often below 5% and some around 4% to 4.3%. Here’s some other options to verify your income https://www.homeloanexperts.com.au/low-doc-loans/alternative-income-verification/

    Most banks would use your taxable income but would add back depreciation. Some would be harsh and would take the lower of the last two years income which isn’t fair on a new business like yours.

    Having a larger deposit (>20%) will also allow us to use some different methods some lenders have which allow more of your income to be used.

    Best of luck!

  • Willow

    Hi guys, I’ve been running my own business for well over a decade now. Currently, I have half a dozen employees and the turnover and income is pretty good. I have tax returns but the last two years’ returns show a bit of a drop in income. I am living in a display home right now and I have collect a 10% deposit to buy a second display home for which I need to borrow at least 80% of the property value. I have all my banking facilities with ANZ and so I tried applying with them but they said no.

  • Hi Willow,

    A business with a long history is great but because of the drop in income in your last two years’ tax returns, we may have to go for a low doc display home loan if lenders can’t get convinced to go full doc or they refuse just as your bank did. However, we may be able to get one of our low doc lenders to consider the display home at 80% LVR with an accountant’s letter or even go with a commercial lender. We will need more info so we can properly assess your situation and highlight your strengths to increase your chances to go full doc. Please call us on 1300 889 743 and speak with one of our self employed home loan specialists.

  • steen

    I’ve been getting great business since before last year so will the bank accept my new income completely?

  • Hi steen,

    Banks and non-bank lenders alike tend to be very wary if you have an income that has increased or decreased by a large amount in the last two years. Some may use the lowest of the income figures for the last two years, others may use the most recent year’s income as shown on your tax return or even the average of the two years income. Please speak with one of our mortgage brokers on 1300 889 743 to find out the lender that can be the most flexible with your situation.

  • donald

    My business turns 3 next month and I want to expand it a bit to reel in more customers. I own a house valued at $450k with $190k still owing on the mortgage, and I want to refinance and cash out my equity to borrow $100k.

  • Hey donald, that sounds fine. You’ll need to prove your income and meet the serviceability requirements of the loan through at least an accountant’s letter and income declaration. Please call 1300 889 743 and speak with a self employed home loan specialist or simply enquire online and one of us will contact you within 24 hours:
    https://www.homeloanexperts.com.au/free-quote/

  • Rob

    Hi there i have been running for nearly 2 years now but my last financial was at a loss. Would i be able to get approved for mortgage end of june this year? I will roughly earn 40-50 grand this year including my partime job.

  • Hi Rob
    Some of our lenders just need one years financials.
    Others you can provide 3 years and explain the reason for the dip in the middle year. However this is over-complicating things.

    What’s most important is that you’re sure of your future business income and ability to pay the loan. If you like give us a call when your 2017 returns are done and we can assess your situation and work out which banks will approve your application.

  • Lori Hayes Gentry

    we are both self employed after write offs we have an AGI of 4000 last year and 6ooo this year. We know we can pay a morgage but no lender will touch us. any helpful ideas on where to go. Im in Missouri

  • Hi Lori,
    We can only lend in Australia sorry. I’d recommend that you talk to a local mortgage broker and consider showing a higher income next year so that you can qualify. If you can afford it then showing your real income is an easy way to get approved.

  • brand0n

    I’m a self employed podiatrist and I’ve been trading for over 6 years. I applied for a home loan with a credit union but they went through my regular bank statements and asked explanations for every day transactions, including some 50 everyday transactions. Too much hassle I think. I would like to apply for a home loan with a lender that will just need 3-six months of savings history, and up to past 5 years tax returns and notices of assessment from the ATO. Do you have any lenders that will accept an application based on this information?

  • Thanks for enquiring, brand0n. Based on that info, this should not be a problem. We have a few lenders that can lend you up to 95% plus LMI so it will be a 97% lend, and a few that can go beyond 97%, however, they are a little more expensive. While they often ask a couple of questions the level of detail they are requesting from you isn’t normal. Please call 1300 889 743 to discuss this with an expert self employed home loan specialist or simply enquire online:
    https://www.homeloanexperts.com.au/free-quote/

  • Sophie Crenigan

    My partner was a full time restaurant manager and recently became a partner in the business, consequently getting a pay rise Would lenders consider the fact that he was an employee prior to the partnership? We’re looking at refinancing and increasing our mortgage slightly. When it comes to everything else we’re the perfect applicants – great credit history, a house that has increased in value significantly due a renovation. I am not sure what our options are?

  • Hi Sophie,
    If he’s still receiving a PAYG income then as long as the business is trading at a profit we can proceed. We’d need a letter from the company accountant confirming that he is now a part owner and that the business is trading at a profit and he still receives his PAYG income.
    If it’s more complicated and he is fully self employed with no salary at all then we’d need to discuss the full scenario to see if it’s possible.

  • nexory

    That’s a great site, lots of help to clear the fog! Many thanks!! I’m wondering whether a half decent deposit would help? I’m self employed with a not so great income. Very up and down averaging at ‘ok’ although I could prop it up a little with some contract work. However, after a break up I have half a house to sell. So I was hoping that borrowing only 35 – 40% of the total would make a difference? Since it’s in my own interest to keep repayments as low as possible, I’d go for build only a very small (1 BR) house to start with and then add on later if it becomes necessary. Is that kind of approach any good? Or are banks really only looking at income.

  • Thanks for the feedback Nexory.
    You need to have the ability to make repayments and also a deposit. There are low doc loans which can help you if you can’t prove your income, but really we should make sure that you aren’t borrowing more than you can afford! Otherwise it won’t be your home for very long.
    If you’d like our help then please contact us and we can work out how much you can comfortably afford. https://www.homeloanexperts.com.au/free-quote/

  • Milam

    Hello, my wife has a car loan on her name but it’s on my business so interest is tax deducted. Can this be added back?

  • Yes, you should be able to have it added back and you will need to get an accountant’s letter to explain this.

  • Lena Greig

    Great article, thanks! I am the sole director and shareholder of my company. I take a regular salary rather than just drawings from profit. Does this factor into the loan application? Company is doing well and posting a good profit after my salary and other staff.

  • Hi Lena,
    Lenders would assess the company as well as yourself. The reason for this is that if you have significant cash in your business you can pay yourself a large salary that isn’t sustainable. Lenders have been caught out by this in the past.
    In some cases we can use just your salary where there is evidence that it is regular and that the business is profitable AND we are not using the business profit in our assessment.
    There’s plenty of ways to assess self-employed income. It’s usually best to let us know what you can provide and then we’ll work out the best way forward.