Self-employment is a common long-term career goal amongst Australian workers. For the first time, less than 50% of Australians are employed in full-time permanent roles and the freelancing industry is booming. Self-employment is well and truly on the rise. With it comes a wide range of benefits; being your own boss, freedom, flexibility, diversity and empowerment. Yet history says that banks view self-employed home loans in a lesser light.
If looking to invest, you may have heard on the grapevine how difficult it can be to secure a home loan when self-employed. The truth is banks like stability, and generally stability comes in the form of a regular income. As a self-employed person, there are a few more hoops to jump through and scrutiny to undergo in order to prove you are a stable and reliable potential home loan customer.
That is where we come in.
Our home loan experts are here to assist you in collating the right information to present to the banks. Being self-employed should not be a barrier to securing a loan. It's simply knowing the right information to increase your chances of success.
As a general rule, the banks like to see two years of financials if you're self-employed. This means providing your last two years' tax returns. As any self-employed person knows, there are waves of ups and downs in business. Your cash flow may differ substantially from one month to the next. This is why the banks like to see a full two years’ to ensure you can successfully make your repayments.
This is also advantageous for you as a home loan customer. The last thing you want is to put an additional financial strain on your business if you cannot make your repayments.
If you have been in business for less than two years and do not have two years’ worth of tax returns to show, there will be additional information you need to provide. You may be asked to provide proof of working within the industry prior to your self-employment. This can mean providing proof such as payslips, group certificates and references from previous employers. The more proof you can provide the banks showing that you are a reliable and low-risk potential client, the better!
They can use your tax returns in a number of ways to calculate this data:
Your lowest income year over the last two years
Your most recent income from the last financial period
An average of the two
Consideration of ‘add back’ expenses
We will work with you to collate as much data as possible to support your application. This can include:
Your most recent tax returns
Business Activity Statements (BAS)
Access to your ATO portal or print outs
Bank statements
Asset inventory
Credit history
We then work to find a range of banks with the best rates to secure your home loan based on your personal situation and documents.
Potential add backs are expenses that you have incurred as a business owner that have reduced your taxable income. By adding back these expenses, you can drastically increase your assessable income and increase your chances of securing a loan. Add back expenses can include:
It is important to understand both your financial capacity as a business owner and property owner. What can you comfortably afford to repay? Be sure to take expenses such as insurance, rates, water and maintenance into account. The home loan itself is just one expense when owning your own home. The more you know and understand your financial capabilities and restraints, the better.
Banks like to see organised financial records. So, before you take the first step, ensure your financial records are up-to-date. Lodge your tax returns, pay your BAS and ensure all is up to date.
Start getting your paperwork into order so when it's requested you have everything on file and ready to go. Save and print copies of your tax returns, Business Activity Statements, ATO records, bank statements and credit history report. If you have previous references and pay slips from previous employment, include those too.
List and provide evidence of all your potential business add back expenses from the past two years. These will help to bolster your assessable income and increase your borrowing power.
Ensure your business income is working for you as much as possible. Park your GST and PAYG payments into an account where it earns maximum interest until your quarterly statements are due. Your accountant can assist with such tips and tricks. This shows the banks you understand and are a savvy business owner.
Conducting a business forecast for the next 3-5 years is highly recommended to see where your business is headed. It also helps to consider your personal situation in parallel. For example – are you planning on having children and taking time off? Are you planning on expanding, which may require moving to a bigger premises and may incur further costs? This process will help you to assess your future business and personal needs to ensure you can continue to comfortably make your loan repayments.
We are here to assist you in making the process of securing a home loan when self-employed a straightforward one. We cut through the red tape and provide you with the facts. The more informed you are about banks’ expectations and requirements, the greater your chance of a successful outcome.
Don’t let self-employment stop you from owning your own home. Speak to our home loan experts today.
