As a self-employed borrower, obtaining a mortgage can be a bit more challenging than it is for those who are employed by someone else. This is because lenders need significantly more information to assess a self employed applicant’s income compared to a salaried applicant. However, with the right strategies, it is possible to maximise your borrowing capacity as a self-employed borrower.
One of the most important things you can do to maximise your borrowing capacity is to demonstrate a consistent income. Lenders want to see that you have a stable income that can support the mortgage payments. To do this, you should be able to provide at least two years of tax returns, as well as financial statements for your business. This will help lenders to understand your income and expenses, and to determine how much you can afford to borrow. Some lenders however will accept one year’s financials, so if your most recent year was substantially better than the year before, it may be used in isolation to achieve a higher borrowing capacity.
Another important factor to consider when maximising your borrowing capacity as a self-employed borrower is company debt. Asset loans, be they for cars, tools of trade or working capital are all considered as personal liabilities. Often these loans are at substantially higher interest rates than residential home loans and therefore consolidating those debts into the home loan (taking care to maintain good accounting practices and separation of personal and business use debt) can increase borrowing capacity.
In addition, depreciation, instant asset write off, excess superannuation payments and interest paid on company loans can also be added back to bottom line income subject to lender policy.
However, the most important thing to remember when applying for a loan when self-employed is operating in the cash economy does you no favours and maintaining sound accounting practices and having up to date financial and tax returns is critical. Lenders only look at verified income based on the previous years (or two years) submitted company and individual tax returns. So forget about going to the bank and saying you’re shooting the lights out this financial year as it won’t help! Make sure you have your returns professionally prepared and lodged to ensure your application can get past step 1.
Finally, working with a reputable mortgage broker who can also work with your accountant is the best way to maximise your borrowing capacity. A mortgage broker can help you to understand the lending process, and can also provide you with access to a wider range of lenders. They can also work with your accountant to plan in advance and help you to put together a strong application, which will increase your chances of being approved for a loan.
In conclusion, as a self-employed borrower, obtaining a mortgage can be more challenging but planning is key. By demonstrating a consistent income and maintaining prudent fiscal conduct in your business (in relation to revenue, liabilities, up to date tax returns), planning in advance and working with a reputable mortgage broker, you can increase your borrowing capacity and make the process of obtaining a mortgage easier. Get a consultation with an expert now!
