Landing a home loan while self-employed

What are the most common home loans for self-employed people?

Most self-employed people we see for home loans are not first-time buyers – rather, they are typically sophisticated upgraders. They are higher income earners who are looking to buy larger homes or investment properties, to reap the rewards of their successful business. They are savvy, with a strong understanding of the market and finance. However, they are usually time poor and the debt level incurred is typically higher.

It’s common for these borrowers to require the fulfilment of multiple finance needs such as home, business and equipment loans, which can add a further layer of complexity and know-how.

It is therefore common for these borrowers to require a more premium banking service, rather than taking a cookie-cutter approach for each separate requirement.

What is the definition of self-employed?

Business owners (companies, trusts), partnerships, sole traders (builders, electricians etc) and anyone who operates under an ABN/outside of PAYG.

How long do you need to be self-employed for to qualify for a loan?

We recommend that you can demonstrate success in your industry for at least two years.

If you have recently begun a new venture or moved companies, as long as you can demonstrate consistency in your industry for at least two years, you are potentially still eligible. Speak with the Duo Finance Team to see if you qualify.

How are incomes calculated and assessed? What should I prepare?

Please prepare two years of business financial information and tax returns, as well as two years of individual tax returns. If you are a sole trader, you need only prepare individual information.

You will also need to obtain two years notice of assessment from the ATO.

Incomes will be assessed alongside an assessment of business performance (ie. If the business is showing a loss, income can be reduced based on this performance assessment).

Due to COVID-19, the banks may require additional documents to verify income and may factor in any drop in business performance to assess how much you can borrow. The Duo Finance team can provide advice on how this may specifically affect your circumstances.

What is an addback expense?

An addback expense is just what it sounds like – an expense that is allowable as an added back to the profits of a business to better reflect the true income when determining your borrowing potential. This typically includes existing loan interest and depreciation of working assets. Other one-off items or industry specific items may also apply.

What is the perception of self-employed borrowers from lenders? How can I best position myself?

Banks look favourably upon high-income self-employed people in stable professional industries such as medical, pharmacy, accounting and legal. Prior to COVID-19, lawyers, doctors and accountants did not incur additional mortgage insurance costs for lending up to 90% of the security value.

Self-employed applications do take longer to put together and process, since they are made up of many small parts. This is why self-employed people benefit from guidance from brokers – it gives them a greater understanding of the process and ensures that it runs smoothly.

Banks like to see consistency – if a business grows or drops too quickly within the two-year period, it can be a red flag that indicates that a business may not be able to keep track on growth. To position yourself most favourably, it is beneficial if you can demonstrate consistency in your business earnings across the taxation period. If not, be able to provide detailed explanations for any major variances.

Takeaway tips for self-employed borrowers

Improving your financial literacy is a critical part of your journey towards home ownership.

Many Self-Employed people look to their accountant for tax minimisation strategies. This is obviously an important consideration however, they often fail to consider the impact this could have on their borrowing power and future loan requirements. Minimising tax while still maintaining your borrowing power is a delicate balance, but an important one for any self-employed person looking to borrow into the future – we can help you work it out.

Accountants often talk to self-employed clients about their big tax bills and look to provide them with cash flow solutions such as a payment plan. It’s important to remember that most banks don’t look favourably upon ATO payment plans – avoid them if possible. It is also important that you keep your accountant informed around your lending requirements so this can be considered.

Do you have a home loan question that isn’t answered here? Get in touch with Duo Finance today and find out what we can accomplish for you.