Every year, thousands of Australians decide to quit their full time jobs and use their skills and expertise to become business owners.
The problem is that most banks just don’t understand how self-employed people make a living.
With sometimes fluctuating incomes and no payslips as financial evidence, it can be really difficult for business owners to qualify for a home loan.
How do I qualify?
Generally speaking, most of the credit officers handling your application don’t understand the financial situation of self employed borrowers, particularly if the business is set up in a trust structure.
Luckily, not all lenders have the same documentation requirements and won’t require you to provide documents like profit and loss statements or an accountant’s declaration.
As long as everything stacks up in the following documents, we know lenders that will consider your application:
- Your last 2 years individual and business tax returns and accompanying notices of assessment (NOA).
- Your Australian Business Number (ABN) showing that you’ve been trading for the past two years.
What about profit and loss statements?
Generally, most banks won’t ask for this. The only exception is if the tax returns that you’re providing are already a few months into the financial year.
For example, If you apply for a home loan in February, your most recent tax return is already well over 6 months old. It’s this reason that the lender will usually ask for more financial evidence, usually in the form of your most recent profit and loss statement.
You’ll still need to meet all other standard requirements regarding your income, asset position and credit history but if you have the above documents ready to go, give us a call on 1300 889 743 or complete this free online enquiry form and we’ll let you know if you qualify for a business owner home loan.
What if I haven’t lodged my latest tax return?
Most banks will require you to have at least 2 years tax returns before they will even consider your application.
If you haven’t lodged your latest tax return but your ABN shows that you’ve been running a business for 2 years, you may still be able to get approved for a business owner home loan. If you have an exceptionally strong situation, you may still qualify even if you’ve only been working for 18 months.
What if I’ve only been working for a year or less?
Have you been running your business for less than a year?
Banks are very conservative when it comes to business owners in this situation because you won’t have the financials, specifically tax returns and NOAs, to prove that you’re running a profitable business and earning a sufficient income.
One of our lenders can look at your income from your last job if your projected income for your business is similar to what you previously earned.
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.
For business owners who’ve been trading for one to two years, one of our lenders may look favourably on your application if you’ve been in the same line of work for some time prior to starting your business and you can provide 12 months worth of financial statements.
What if I can’t provide the usual financials?
There are many reasons why business owners can’t provide 2 years tax returns or other financials confirming their income.
It’s often just a matter of the business owner being behind on their tax requirements, rather than a reflection of financial problems.
In circumstances like this, there are low doc home loan solutions offered by both major banks and non-conforming lenders.
You may be able to get a low doc home loan for business owners if you can provide either of the following:
- Your latest 12 months Business Activity Statements (BAS) (some lenders will accept 6 months BAS if your situation is strong).
- 12 months business transaction account statements (some lenders will accept 6 months if your situation is strong).
- Low doc declaration letter.
- An accountant’s declaration letter confirming your income.
What if I’m a PAYG applicant with a directorship?
A few lenders in our panel have a policy for applicants looking to apply for a home loan as company directors or ABN holders who also receive PAYG income.
If you fit in this category, you won’t be assessed as self-employed by the lenders. The scenarios for this are:
- You are an independent director – As a director, you aren’t a shareholder or have directorship in a business held by a spouse or family members.
- You are an executive director – You have a minor percentage of shareholding, however, limited to also being a PAYG employee.
In this case, you are expected to provide your recent payslips instead of tax returns or a BAS.
Do I really need a low doc loan?
Low doc loans are a solution for business owners and other self employed borrowers who are unable to provide traditional financial evidence, specifically 2 years tax returns.
When assessing your situation, our mortgage brokers will always work hard to get you approved like a full doc applicant and with a major lender.
The reason is that with low doc options:
- Your interest rate will likely be higher: This will vary from lender to lender and what sort of verification or supporting documents that you’re able to provide.
- You’ll need a larger deposit: Typically, this will be around 20% of the purchase price.
- Lenders Mortgage Insurance (LMI) applies at 60%: LMI is an insurance premium charged by the bank when you borrow more than 80% or more of the property value. With a low doc loan, however, mortgage insurance is usually applicable if you’re borrowing more than 60% of the property value. With some specialist lenders we may be able to go up to 85% with no LMI.
It’s usually best to provide all of the financial documents and income evidence you have so one of our brokers can look over them and provide the right solution for you.
It may be that a full documentation home loan is better for you.
Simply fill in this online enquiry form and we can provide a free assessment within 24 hours.
How much can I borrow with a business owner home loan?
- Borrow up to 95% of the property value: If you can provide 2 years tax returns supplemented with NOAs and 2 years ABN, and you meet all other standard serviceability requirements, we can lodge your application as a full doc loan with a major bank meaning you can borrow more at a competitive interest rate.
- Borrow up to 60-85% of the property value: Major banks will only allow you to borrow up to 60% of the property value if you can only provide an accountant’s letter but some specialist or non-conforming lenders will allow you to borrow up to 85%. Conditions apply.
Lenders don’t always charge a higher interest rate
Unless you’re getting a low doc loan, you can get the same low interest rates as a pay as you go (PAYG) applicant if we’re able to get you approved as full doc borrower.
Even if you do get a low doc home loan, making your repayments in full and on time for a period of 2 years may actually see the lender reduce your interest rate back to a standard rate.
What about home loan features?
Yes, you can get all of the same home loan features as standard full doc home loan, including:
- Offset account.
- Redraw facility.
- Interest only.
- Extra repayments.
- Line of credit.
- Fixed interest and spit home loan options.
What isn’t usually available to you?
The major banks don’t allow you to cash out but we may be able to get this done with a non-conforming lender.
How will my income be assessed?
Lenders ask for your last two years tax returns, specifically, because they can determine the stability of your income year on year.
Any significant difference, either up or down, can make or break your application but it’s not the same for every lender!
Some lenders use the average of your last two years income or take 120% of the lowest year’s income while others will use the lower of the last 2 years or just take into consideration your most recent tax return.
In addition to the different ways each lender will look at your tax returns, other aspects of your situation may be taken into consideration to strengthen your case. This includes your skills and experience in the industry or the actual risk profile of the industry that you’re working in.
Lending policies change pretty regularly depending on their appetite for business owner loans and particular types of professionals but, as mortgage brokers, we keep on top of these changes for you so we know which lender to go with.
In some situations, it makes sense to be selective when choosing financials to give to the bank in order to prove your highest possible income.
Sometimes we may ask you for more than just tax returns and ABN because we need to build a stronger case with the lender so the more up-to-date the documents that you have on hand, the higher your chances of getting approved.
How can add backs give me a better chance of getting approved?
When running a business, you will incur expenses which you can document in order to reduce your taxable income.
Some lenders can actually add back these expenses because they understand are not 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:
- Interest expenses: We may be able to have a lender add back interest that you’ve tax deducted on any business or investment loans that you have.
- Trust distributions: Distributions made to family members via a discretionary trust can be added back with select lenders but it’s usually on the condition that you can provide an accountants letter confirming that the beneficiaries are not financially dependent on this income.
- One off expenses: These costs may include motor vehicles or new tools and machinery that you need for your business. With an accountants letter confirming that this isn’t an ongoing cost, we may be able to add this back to your taxable income.
- Additional superannuation contributions: This refers to lump sum contributions to your super above minimum contribution requirements.
- Depreciation: Depreciation is a tax deduction, not an everyday expense so some lenders will add this back to your taxable income.
- Company car: If you have a car that is used by your business and yourself then it is likely that you have tax deducted many of the expenses associated with running a car. Lenders don’t add these costs back to your taxable income but they will often add in an extra $3,000 to $6,000 in income to compensate for this.
- Rental property expenses: Depreciation on your properties, management fees, repairs and other rental property deductions such as negative gearing can all be added back. Keep in mind that rental income is deducted from your income because lenders assess this separately to your main income.
- 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. If you don’t own the entire company then lenders will assess your share of the net profit.
If you’re a business owner in need of a home loan, please call us on 1300 889 743 so we properly assess your situation and get you a great deal based on your business circumstances and needs.
Tax benefits to setting up the right home mortgage structure
As mentioned above, you may be in a position to claim some of the interest on your home loan as a tax deduction but did you know there are other benefits to setting up the right business owner home loan structure?
It’s essential that you speak to your accountant before making a decision related to tax or finance.
Are you really a business owner?
Sounds like a strange question: of course you’re a business owner!
Well, you may refer to yourself as a business owner but it’s important to understand that the you earn an income won’t be viewed the same by all lenders.
For example, if the majority of your business involves contractor or sub-contractor work, you may be able to be assessed as an employee with some lenders, making it more likely for you to get approved for a home loan with a wider variety lenders and the ability to get a really competitive interest rate.
Complete our free assessment form because we’re specialists in taking a comprehensive approach to looking at your situation.
In some cases we find that we can get a business owner approved with a major lender just by providing the right financials.
Why are banks conservative when it comes to business owners?
The major issue that banks have with business owners and other types of self-employed borrowers is that it can difficult to work out how much they’re earning and whether they can afford to make mortgage repayments.
PAYG borrowers usually just need to provide their last two payslips to prove their income because they’re an up-to-date reflection of how much they’re earning.
With business owners though, they’re often required to provide tax returns supported by things like their Australian Business Number (ABN), both individual and company tax returns, and profit and loss and business transaction statements.
It sounds like a lot of financial evidence but the problem is you might not have things like your latest tax return or your profit and loss statement may be up to 2 years old. In addition, banks will generally take your financial statements like taxable income on your tax return on face value and not take into that you may have reduced it for tax purposes.
The other problem is that business owners’ income can fluctuate depending on how profitable their business is: some years are better than others. We understand this but most banks don’t!
It’s the reason why choosing the right lender is crucial because they each assess your income through different methods.
Going with a specialist mortgage broker that can help you highlight the strengths of your application is also really helpful.
Do you need a commercial loan?
Growing from a home business to an office or looking to upsize to a bigger commercial space?
Apart from home loans for business owners, our mortgage brokers are specialists in commercial property loans no matter whether you need a commercial, industrial, agricultural or retail property.
Sam runs his own landscaping business in Geelong.
In his 2012/13 tax return, it showed that Sam’s taxable income was $140,000.
After such a good year, he decided to celebrate and take his family for a holiday for a few months over Christmas and into the new year.
Because of this, his taxable income for the 2013/14 financial year fell to around $30,000.
After another solid business year though, his income went back up to $140,000.
Around this time, he felt he was in a strong enough financial position to take the leap and buy his first home.
After applying for a home loan with his bank, he was shocked to find that he was declined.
Although he had earned a good income over the 2014/15 financial year, the previous financial year didn’t reflect the same strong earnings.
Banks usually require 2 years tax return when assessing your ability to make mortgage repayments so when the bank assessed Sam’s tax returns they weren’t satisfied with the consistency of his income.
Not knowing where to turn, Sam spoke with a mortgage broker that specialised in home loans for business owners and found out that he had a chance of getting approved with another major lender if he could provide an accountant’s letter.
Sam was able to get his accountant to provide a signed declaration explaining that:
- He was on holiday over 2013/14 and, therefore, wasn’t trading over the period.
- His 2012/13 taxable was consistent with his 2014/15 taxable income.
With this evidence, the lender was able to use his 2014/15 tax return as evidence of Sam being able to earn a consistent strong income going forward.
Sam was able to meet serviceability and get his home loan approved at a competitive prime lender interest rate.
He’s now happily living with his family in their new home and his landscaping business is going strong.
Speak to a business owner home loan specialist
Before you make an offer on a property, get pre-approved for a business owner home loan!
Lender selection is key as well as having the right business and income evidence needed to present a strong case.
Please call 1300 889 743 or complete our free assessment form today to speak with one of our mortgage brokers. We’re specialists in home loans for business owners.