Business Owner to Home Owner: How Banks Treat Self-Employed Income

Getting a mortgage as a self-employed person can present some unique challenges. Banks will need a detailed look at your financials, to assure themselves your business provides a reliable income. The exact approach a bank takes will depend on how long you’ve been self-employed, with different criteria based on the length of your business operations…

SELF-EMPLOYED FOR TWO OR MORE YEARS

If you’ve been self-employed for at least two full financial years, banks will assess your income based on your net profit.

Add-Backs
In addition to your reported net profit, lenders will consider ‘add-backs’ - expenses that don’t directly affect your cashflow, but reduce your taxable income.

Common add-backs include:

• Depreciation - as this is a non-cash expense, depreciation can be added back to your net profit, increasing your income figure.

• Home office costs - if you claim home office expenses, these are also added back.

• Shareholder salary - any salary you pay yourself as a shareholder is added back and can be included in your income calculation.

Keep in mind that not all banks treat add-backs the same way. Different mortgage lenders have different approaches to what they’re willing to add back, so make a point of finding out how your bank intends to assess your financials. You may get a better result with a different bank or lender (this is one area where an independent mortgage broker like us can really help!).

One-Off Expenses
Identifying one-off expenses can help your application by presenting a more accurate picture of your future financial position. For example, if you’ve had one-off expenses that won’t recur (valuation costs, legal fees or consulting fees, for example), the bank may deduct these when evaluating your ability to afford the mortgage.

Ongoing Debts
In addition to evaluating the net profit of your business, banks will also investigate whether your business has any ongoing debts. While interest charges will appear in your business expenses, principal repayments don’t. So, to get a full picture of affordability, banks will calculate your repayments on any existing business loans and factor this into their overall assessment of whether you can comfortably service both your proposed mortgage and your business debts.

Adjusted Net Profit
With the above elements factored in, the bank will then apportion the adjusted net profit according to your equity in the business - if you own the entire company, the full amount is considered your income. However, if you share ownership, the bank will calculate based on your percentage of ownership.

SELF-EMPLOYED FOR LESS THAN TWO YEARS

Banks view shorter business histories as higher risk, so if you’ve been self-employed for less than two financial years, the process is more complicated. Even so, there may still be options available to you, depending on your circumstances:

1. Industry Experience as an Employee:
If you were previously employed in the same industry and are now contracting, some banks may consider this experience. This allows the bank to look more favourably at your income, as you’ve demonstrated consistent industry success, even if you’ve only been self-employed for a short time.

2. One Year of Trading History:
Some banks will consider your business’ financial performance with just one year of trading history.
However, they’re likely to discount your income by around 10% to account for potential business fluctuations - keep this in mind.

NON-BANK LENDERS: A FLEXIBLE ALTERNATIVE

If you don’t meet the criteria of traditional banks, non-bank lenders or finance companies could be an option for you. While these lenders typically charge higher interest rates and fees, they are more likely to consider business owners with shorter trading histories.

Some non-bank lenders might approve mortgages with as little as 6 months of trading history, but this is assessed on a case-by-case basis. Typically, these lenders require a 30% deposit due to the higher risk involved.

While the cost of a mortgage with a non-bank lender may be higher, you might like to look at it as a stepping stone - a means to an end; to get your feet onto that property ladder.

PREPARING FOR YOUR MORTGAGE APPLICATION

To give yourself the best chance of mortgage approval, here are a few tips:

Maintain detailed financial records - keep your profit and loss statements up to date and well-organised.

Work with an accountant - a good one can help you maximise your add-backs and can also help present your financials more favourably to lenders.

Consider alternative lenders - if traditional banks don’t work out, non-bank lenders could be a viable avenue for you, albeit with higher costs. Our mortgage brokers have access to a number of different non-bank lenders - get in touch, and let us help you explore a few different options.

Getting a mortgage as a business owner can undoubtedly be more complex, but understanding how different lenders treat
self-employed income and exploring flexible options will help you successfully navigate the process.
Contact our mortgage brokers - we love helping fellow business owners become home owners!

The WealthHealth blog is not intended to be taken as personal advice and is for informational purposes only.
Before acting on this information, contact our mortgage broker to ensure it is suitable for your circumstances.