Getting Mortgages for Self-Employed Borrowers
When you’re self-employed, balancing the books is tricky enough. That’s not even accounting for the difficulties self-employed business owners encounter in getting a mortgage together for a house or an investment. Our award-winning experts have put together an easy guide on how to best go about getting mortgages for self-employed borrowers.
Recovering From the Pandemic
The pandemic has had many different effects on self-employed situations. Some people have come out of it better than before, with the government’s economic stimulus measures underpinning their business growth, and different markets looking to them for product and service provision. Some people, however, have come out of the pandemic worse off, with revenues slashed, and the government’s economic stimulus measures doing little to help. This unpredictable situation has caused headaches for banks and mortgage providers.
How Do Lenders Determine Income for Getting a Mortgage as a
Self-Employed Borrower?
It is currently quite difficult for banks and mortgage providers to accurately determine previous, current, and future income and assets due to the unusual scenario the global economy is in. Each lender has its own method for determining incomes, which include:
- using the lowest of the income figures for the last two years.
- using the most recent year’s income as shown on a tax return.
- using the average of two years income or take 120% of the lowest year’s income.
Add backs
There are significant expenses that self-employed people can incur, that affect their taxable income, but not their operations. Lenders will add these back to determine real income. The more expenses that are added back, the more borrowing power you have! Examples of add backs include:
- Superannuation Contributions – If you have contributed more to your super than the required minimum amount, these can be added back
- Depreciation – The reducing value of your assets isn’t necessarily a day to day expense, however, some lenders may add it back to your taxable income
- Rental Property Expenses – Repairs, depreciation, management costs, and negative gearing are added back,
- One-off expenses – Large, one-off expenses can also be added back alongside an accountants letter
- Interest Expenses – Any interest expenses from your business/investment loans you have deducted from your tax can be added back to your income
- Asset write-offs – Any tax write-offs for assets purchased with the 2020 budget changes, or the $150,000 add back stimulus scheme can be added back to income
What Mistakes Can Banks Make with Self-Employed Mortgage Applications?
Given the complicated nature of getting mortgages for self-employed borrowers, there is plenty of opportunities for mistakes to be made by lenders. These include:
- System-Based Approvals – When collecting financial information, large, automated and complex systems collecting this data can sometimes not take appropriate considerations into account when designating a loan amount
- Double Dipping – Sometimes banks can accidentally count the same incomes or expenses twice through different accounting measures. This can distort the actual incomes they determine from your activities, and can give you the wrong mortgage
- Company Car – Lenders continually ignore the add backs that company cars give self-employed persons, with this being able to increase assessed income
What Do I Need To Do?
Ensuring that you are putting forth the RIGHT DOCUMENTATION to ensure you are putting your business activities in the most favourable light is key. We at Vision have helped hundreds of self-employed people get the best mortgage possible for them. If you’re looking for an award-winning broker to help you out, please get in contact with us, we’d be happy to help!
