Mortgages for the self-employed

A mortgage can be a daunting task for anyone, but for self-employed people, there is greater scrutiny from the banks to ensure they are not a high risk. Traditional employees have a steady income, and a regular paycheck or salary, whilst businesses often fluctuate within their industry, the market, social and economic issues, health, and well-being… the list goes on.

The biggest hurdle is proving financial stability and a reliable income to service the loan. The information comes from business accounts, tax returns and financial statements.

When running a business, it’s common to ‘write off’ as much as possible and save yourself paying so much tax. But this does not represent the real story of a business owner’s financial income. We start with the bottom line: the amount your business pays tax on – NPAT (net profit after tax). This is the number people want to make as small as possible so that they pay less tax.

Then, we work our way up your financials and add things back in; shareholder’s salary, depreciation expenses (a tax deduction, but a non-cash deduction), home office expenses, and sometimes interest expenses.

Adding these things back to the bottom line gives a far better picture of your financial situation and how much you can borrow. And this is why it is so much more complicated when compared to proving income to an employed person or couple.

Lenders typically want two years’ worth of financials, although some accept a shorter period under specific circumstances. So, the biggest piece of advice is to get your paperwork in order, and a highly competent bookkeeper is worth their weight in gold – especially if they know your long-term goals of property ownership.

We are also aiming to prove the sustainability of the business. Ideally, banks want ten years’ worth of financials because that proves sustainability. But if they waited that long, they’d never loan money to business owners. So, the line in the sand has been drawn at the two-year mark.

You also need to consider that two years’ worth of financials isn’t just a checkbox; there are many moving parts. The two years’ income could be vastly different, and we need to analyse all the questions from that. Say the first year was better than the second year. Why is it different? Will it happen again? Have you got some projections to show a trend?

I have experienced this with my clients when they say, “My last year’s income was good; why can’t we use that?” But if you can’t prove it will or won’t repeat, the bank will ask you to go away and prove the “good” year will stay.

The self-employed borrowers who find the mortgage process the simplest are the ones who are most prepared. They’ve organised their accounts, got a business plan and history, a genuine market, strategies, and a history of changing tack when needed; they’re tracking the KPIs, etc. The bank will look at the proof provided – they can only look at what is provided.

Put it this way; the loan will last for 20 to 30 years, so you need to prove that your income has the same longevity.

• Stricter criteria and tougher process = “It’s really hard for self-employed people to get a loan”
• Campbell’s response = “If you’re prepared, it’s not”

If you can’t show a sustainable business, of course it’s really hard to get a loan!

If you need more information for your loan application, like a business plan or financial projections, we usually ask you to talk to your accountant or a consultant who can help. Either way, chat with us, and we’ll get you on the path to property ownership.