Article by A.K Vearing
Working for yourself has become quite trendy in recent times. The problem is that when it comes to buying, securing a mortgage can be slightly more difficult. Unfortunately, the banks see self-employment as higher risk. A 2017 report by Pepper Money stated that “26% of Australians who had been knocked back for a loan were refused because they were self-employed or worked part-time.” Source. While there is no doubt that being self-employed makes getting a mortgage more difficult, it’s by no means impossible!
Here are some things you should know before applying for a home loan:
Have your tax up-to-date
It is important to demonstrate a history of income through your tax returns, preferably two years worth but the more you can provide the better. Banks want to see that your business is profitable, so it is essential to not downplay your income for tax purposes. Without a regular income, lenders will rely on formal tax assessments to confirm a self-employed borrower's income, which can result as a disadvantage for you when applying for a home loan.
Be prepared to explain your income situtation
Commonly, the nature of self-employment can result in occasionally irregular income, illustrating a ‘lumpy’ cash flow. Lenders will view the borrower's total income over the past 12 to 24 months. The fact that your income may have been earned irregularly is not that important, it’s about the total amount. Lenders do like to see consistency, however, as it can prove reliability. Just be prepared to explain fluctuations in your income, especially if it has significantly increased or fallen over certain periods.
Evidence of your income is important but lenders are also interested in understanding your living costs, regardless of employment status. Therefore, it is essential to keep records, including invoices relating to your business expenses so you can provide them to the lender if need be.
Lenders will also review any add-backs. An add-back is any expenditure that your lender recognises as something other than an ongoing expense and not being part of regular business. They may result in reducing your taxable income but don’t necessarily lower your actual income. It is important to understand your financial situation on all levels before applying for a home loan.
Examples of further items you’ll need to provide evidence of:
Additional contributions you make to a superannuation fund
Depreciation on your taxable assets
Any one-off expenses that don’t show up again in other tax returns
Any net profits you retain in a company (Net Profits Before Tax)
Timing is everything
If you are new to self-employment, delaying your home-buying plans until you're established and have a better idea of your annual income may be advantageous to your ability to secure a home loan. Lenders want some reassurance that your business is producing enough revenue to service a loan, especially if you're in a start-up business. Getting advice from a lender or mortgage broker at an early stage will give you a better idea of whether you're likely to qualify for a home loan and how much you can borrow.
Read more here on 7 more things to consider when buying property.
Are you aware if you're eligible for any of the grants and schemes on offer to home buyers in your state? Read our article on available homebuilder & home buyer grants, schemes & concessions you may be able to take advantage of when looking to buy.