How do you get a Home Loan if you’re Self Employed?
By paying tax, thats how!
The Rules of Lending have changed and this is having a dramatic impact on Business Owners wanting to borrow for a home.
It has not become any more conservative and credit policies have not contracted all that materially from 12 months ago.
What has changed is that lending decisions today are becoming increasingly more evidence-based than ever before. And they now need to be, to remain legally compliant. This then leaves very little scope for “exceptions”
What This Means for You?
- It will be your “taxable income” as evidenced by your ATO Returns that will determine what you can borrow.
- How CONSISTENT your earnings are is EQUALLY important as how MUCH you earn
- No amount of cash deposit or real estate collateral will have any impact on 1. and 2. above
Taxable Income
- This is the key driver that determines how much you can borrow.
- The lender will ONLY accept as “taxable income” what you declare to the ATO
- If you don’t declare your cash earnings, neither will the lender!
- If you claim all your travel, holidays, food, and household expenses as a tax deduction to reduce your “taxable income”, then so will the lender!
- 2 consecutive years evidence, no more than 12 months old
- Where earnings are inconsistent, use the average
This is making it difficult for some Business Owners because “what they declare” does not truly represent what they really earn.
In the past Business Owners only needed to “declare” an income, self-witnessed. Now you need to prove it and not just with some internal MYOB/XERO printout, but a full and complete set of ATO Returns.
Business Owners need to appreciate that it doesn’t matter what you OWN or how little you OWE. It is what you EARN that determines HOW MUCH you can borrow.
What are the Rule of Lending for Business Owners?
- Get Finance Approval IN WRITING BEFORE you go shopping!
- It’s all about “taxable income” so keep your ATO Returns up-to-date
- PLAN BEFORE YOU BORROW. If you intend borrowing, alert your Accountant ahead of time so that you can make financial plans together that may involve a shift in strategy for the next year or two.
- Remember, once its down in “black and white” it’s there forever!
- A low “taxable income” may negatively impact how much you can borrow for the next 2 years.
- As a general rule, the higher your “taxable income” the more you can borrow
- So it may be in your best interests to pay a bit more tax today if it means being able to afford your dream home tomorrow.
Small Business A
| Actual Income | Declared Income | Actual Expenses | Additional Declared Expenses | Taxable Income | Income Tax Payable | Net Income After Tax | Borrowing Limit |
| $120,000 | $80,000 | $15,000 | $25,000 | $40,000 | $6,150 | $33,850 | $163,000 |
Small Business B
| Actual Income | Declared Income | Actual Expenses | Additional Declared Expenses | Taxable Income | Income Tax Payable | Net Income After Tax | Borrowing Limit |
| $120,000 | $120,000 | $15,000 | $25,000 | $80,000 | $18,750 | $61,250 | $471,000 |
Small Business C
| Actual Income | Declared Income | Actual Expenses | Additional Declared Expenses | Taxable Income | Income Tax Payable | Net Income After Tax | Borrowing Limit |
| $120,000 | $120,000 | $15,000 | $0 | $105,000 | $28,375 | $76,625 | $645,000 |
*Based on Citibank Serviceability Calculator 30/06/15. Assumes single applicant, no dependants, no other loans or financial commitments
What about Lo Doc loans?
There are many conflicting opinions about the future of these types of home loan products, as they stand today.
Released a decade ago, these loans were originally designed to suit the needs of Business Owners whose financial records were either unavailable or not reflective of the current financial health of the business.
Instead of producing ATO records, the Business Owner only had to “declare” an income based on his own self-assessment of what his business currently earns. No further questions asked.
Depending on equity, today that same Business Owner will have to supply:
- Evidence of ABN registration 2 years
- Evidence of GST registration 2 years
- BAS Statements and/or Bank Account Trading Statements for the past 6-12 months
And will be charged more and be required to have a higher deposit than Business Owners who are able to borrow “mainstream”.
Talk to your Mortgage Broker
Speak to a suitably qualified Mortgage Broker who has experience in dealing with Business Owners like Gain Financial for professional advice on:
- How much you can borrow
- Which lenders best suit your needs as a Business Owner
- What products you should consider
- How to best structure your finances
- What documentation you will need to prepare, and
- Making the finance application