With the fallout of the Royal Commission ensuing credit tightening, home loans for self-employed borrowers just became a little harder to get.
You’ll need to work extra closely with your mortgage broker and accountant to get your affairs in order early, if you run your own business and are thinking about buying a home.
That way, when your home loan application is presented to the bank, you’ll have the greatest chance of getting the loan approved.
Home loan challenges for self-employed borrowers
For self-employed borrowers, home loans are not as simple as for a regular PAYG employee.
Regular borrowers simply need to show a couple of pay slips and an employment check to confirm their income.
If you’re self-employed, however, you’ll need to present your last two years’ personal tax returns and notice of assessments if you’re a sole trader; and, if you have a company structure, you’ll be required to show two years’ worth of company tax returns and financials.
This all means that starting the process as early as possible is essential; but there are a few tips in particular that you would do well to follow…
Five home loan tips for self-employed borrowers
1. Use knowledgeable professionals who understand the home loan process
A good accountant will usually be able to legally save tax wherever possible by maximising tax deductions and reducing your taxable income.
However, if you’re a self-employed borrower looking for a home loan, this might not be the best strategy because there might not be enough income to support the loan application you’re applying for.
It is therefore best to get a head start by speaking to your mortgage broker to work out what your property goals are and accurately calculate how much income you’ll require to meet those goals.
You can then work closely with your accountant over the coming months or even years to try and meet the required income level.
2. Be careful about “adding back” tax deductions
One of the benefits of being self-employed is being able to “add back” certain tax deductions to increase income available for loan servicing. However there are some pitfalls to this and one of the most common we come across is assuming that 100 percent of depreciation can be added back.
This is generally not the case. If the depreciation is derived from an asset in the business that has a short life and is considered income-producing, for example a tradesman’s tools, then there is every chance the bank will not add it back or will scale back how much of the depreciation can be added back to the borrower’s income.
3. Reduce debt and pay your taxes on time
The best strategy with any debt is to close or reduce credit card limits, reduce any personal loans, and ideally pay them off and close them if you can.
Also – do your taxes when you should and always pay your tax assessments on time. While that applies at all times, it’s even more important if you’re a self-employed borrower looking for a home loan because the bank will want to see that you can manage your existing debt obligations effectively
4. Save a deposit and live within your means
Another tip that applies to all home loan seekers: saving a deposit is crucial but so is demonstrating that you are living within your means while saving. With the added scrutiny of the banks looking into borrower’s bank statements to verify expenditure, it has become increasingly important to keep a very close eye on your expenses and to cut back on excessive discretionary spending if necessary.
5. Seek advice early
Possibly the most important of all: don’t leave it until just before you’re hoping to buy a home to seek advice – or you may be disappointed.
With any home loan application, you must prove that your income outstrips your spending and that you can service the loan. Getting this right takes more than presenting a few quick sums on the back of a paper napkin; it can take a solid six to 12 months of preparation.
Where should you start?
These days, most lenders will offer home loans to self-employed borrowers. However, make sure you deal with a mortgage broker who knows which lenders allow what percentage of add backs. They should also be aware of which lenders assess applications based on averaging two years’ worth of financials – as opposed to one year.
Talk to us here at Right Financial. We don’t charge any advice fees and our preferred focus is on working with self-employed clients.
Our credit advisers have access to specialist lenders that assess applications on a case-by-case basis and tailor their products to self-employed borrowers and contractors, while bank lenders do not.
With our knowledge and experience of rigorous preparation for home loan applications for self-employed borrowers, we’ll provide the best chance possible of getting your home loan approved.