Do banks provide loans to self-employed people?

Any general questions you might have in regards to loans and finance.
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Not Lofty
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Joined: Mon May 16, 2016 4:51 pm

Do banks provide loans to self-employed people?

Post by Not Lofty »

I am a self-employed graphics designer currently renting an apartment in Perth. My annual income is around $80,000 to $90,000. As I have been earning much better and more consistently than what I did when I started out, I want to buy a home for myself in south Perth but I am not sure about the availability of home loans for freelancers like myself.

Can someone explain how home loans work for self-employed people?

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Otto Dargan
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Re: Do banks provide loans to self-employed people?

Post by Otto Dargan »

Hello Not Lofty. Welcome to the forums.

Lenders generally have tough requirements when it comes to self-employed home loans. If you are self-employed, you are normally required to provide your tax returns, notices of assessment, and a letter from your accountant to prove your income.

Lenders can consider the following as your income when they assess your home loan application:
  • The lowest income you earned in the last two years.
  • The most recent year’s income shown on your tax return.
  • The average of the income from last two years.
  • 120% of the lowest year’s income.
Most lenders require you to have been self-employed for at least two years. Although very rare, some lenders may consider people who have been self employed for only a year.

Based on your situation, we may be able to help you choose the right documents to provide in order to help prove your highest possible income. This can include your Business Activity Statement (BAS), an Australian Taxation Office (ATO) tax portal printout or bank account statements from the previous three to six months showing your turnover.

Moreover, your skills as an entrepreneur, your experience in the field, and the risk profile of your industry are also looked by the lender while assessing your application. This makes a huge difference to your loan application.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

Not Lofty
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Joined: Mon May 16, 2016 4:51 pm

Re: Do banks provide loans to self-employed people?

Post by Not Lofty »

Thanks for the prompt reply. I’ve also heard that we can show the add-backs as our final income and could borrow more. Can you tell me what expenses I can add back and how does it all work?

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Otto Dargan
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Re: Do banks provide loans to self-employed people?

Post by Otto Dargan »

Hi Not Lofty,

Generally, your taxable income isn’t exactly 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 but 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: It is a tax deduction but not 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, one off expense then we can often add this back. We may need an accountant's 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.
You can know more about self-employed loans by checking out our website. You can also directly call us at 1300 889 743 or fill in our online enquiry form to see if you qualify for a loan or not.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

Not Lofty
Posts: 9
Joined: Mon May 16, 2016 4:51 pm

Re: Do banks provide loans to self-employed people?

Post by Not Lofty »

I went through your website and got an understanding of what I should do. Thanks for the prompt reply. You’ll receive a call from me within the end of the week. Cheers!

absalom
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Joined: Tue Apr 05, 2016 5:12 am

Re: Do banks provide loans to self-employed people?

Post by absalom »

I am a copywriter with a comfortable income. I want to take out a home loan for a house worth $500,000. I have heard that banks require us to submit our payslips or tax returns in order to process a loan application.

The problem is that I work as a freelancer and I have not filed for any tax returns in recent years. I would be grateful if someone could tell me how a person in my situation can get a loan.

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Otto Dargan
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Re: Do banks provide loans to self-employed people?

Post by Otto Dargan »

Hi absalom,

Lenders tend to consider freelancers as temporary workers. If you have a good income, then you may be able to borrow up to 90% of the property value. Some lenders may even lend you up to 95% if you have accumulated enough genuine savings and are in a strong financial position.

If you are unable to provide sufficient evidence of your income, then you can consider going for a low doc loan instead. On a low doc loan, you aren't required to provide full financials to prove your income.

However, you would still need to provide some income verification documents to convince the lenders of your ability to meet your mortgage repayments. Different lenders have different requirements but you are generally required to provide:
  • Three of your most recent bank statements.
  • Two years tax returns.
  • An income declaration signed by you.
You can check out our website or call us to discuss your personal situation and loan needs.

Cheers,
Otto
Otto Dargan
Mortgage Broker
P | 1300 889 743
Home Loan Experts

absalom
Posts: 5
Joined: Tue Apr 05, 2016 5:12 am

Re: Do banks provide loans to self-employed people?

Post by absalom »

Thanks Otto. I’m going abroad for a training this week, I’ll give you guys a call after I return back after a fortnight. Bye.

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