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Self employed income

Most lenders are pretty conservative with how they assess a self employed person’s income. The general rule of thumb is you will need 2 years tax figures that support the amount you are looking to borrow.

The two years figures will generally be averaged or the lower year’s figure will be taken if the latest year is less than the previous year. Some lenders will take the previous year and add 20% as a maximum.

So you can already tell I am sure that the way lenders assess self employed income does vary a lot! This can have a massive bearing on your borrowing potential as the example below shows.

At Mortgage Experts we understand the different lenders policies and how to use that to assist our clients get a loan. We are self employed too don’t forget!

How different lenders assess self employed income.

EXAMPLE:

John started a business in January 2010 and he now has 3 years worth of self employed tax returns and company reports up to the 2012/2013 tax year as per below. The business is set up as a Pty Ltd company of which John is sole director, sole shareholder and is also an employee. The company has no liabilities and John has no liabilities either. He is single with no dependants. I have outlined his borrowing capacity with a few different lenders below.

2010 / 2011 – $10,000 personal taxable income, $0 company profit.

2011 / 2012 - $50,000 personal taxable income, $20,000 company profit.

2012 / 2013 - $100,000 personal taxable income, $40,000 company profit.

  • Lender A =$380,000 maximum loan amount.
    $60,000 pa income figure used.
    Income assessed as 120% of the previous year’s personal figures. They won’t accept an increase between the years of over 20% and won’t take company profit into account at all.
  • Lender B = $490,000 maximum loan amount.
    $75,000 pa income figure used.
    Income assessed as the average of John’s personal income over the last 2 years and no company profit allowed.
  • Lender C = $704,000 maximum loan amount
    $105,000 pa income figure used.
    Income assessed will be the average of John’s personal income and company profit over the last 2 years.
  • Lender D = $940,000 maximum loan amount
    $140,000 pa income figure used.
    Being the last year’s figures and company profit.

You can see that there is a massive difference between the allowable income calculations that lenders use and the resultant borrowing capacities. A few lender’s use the last year’s figures which can considerably increase your assessable income if you have had a big increase to your income over the last year.

1 year’s tax returns

As mentioned above and outlined in the example (lender D) a few lenders will assess a self employed person’s financials with just your last year’s figures. This can make a huge difference between what you can borrow if your business is growing quickly. Generally you still need to be self employed for 2 or more years.
As there is a lag between when the tax return gets done and when you actually borrow the money often lenders are relying on figures from almost 3 years ago if they are averaging the last two years which most do. So again if you hit this road block there may be an alternative.

Self employed less than the normal 2 years minimum

We have in the past had success helping clients secure a loan when they have been self employed for less than 2 years.

For example an advertising creative who has been freelancing for 15 months with only one year’s self employed tax returns but who has many years experience in their field would probably be OK. This is provided they were previously employed on a similar income amount and could prove as such.

Self employed income and expense add-backs

Often there are expenses in a business that can be added back to the income figures when working out borrowing potential. These are called surprise surprise “add backs” and cover things like large one off costs, non cash expenses such as depreciation, interest on loans being refinanced and additional super contributions for example.

Knowing which expenses can be added back can really boost your ability to secure a loan. This is where an expert can help.

Summary

Self employed income when assessing a borrowing capacity can vary dramatically between lenders depending on their policies and models. If your business is growing (and your lender wants to use figures from over 2 years ago) or you think your lender is just being too conservative please give Mortgage Experts a call to see if we can help.

Our Current Lender Panel

Lex Luther Enterprises Pty Ltd (ABN 58114636949) trading as “Mortgage Experts” is an Authorised Credit Representative (444479) of Martin Warren Thomas McDonald, Australian Credit Licence (391230) under s64(1) of the National Consumer Protection Act 2009.