Home loans for self-employed
Self-employed people are those that earn their income through their own company, trust, sole or trader or non PAYG income earners.
Traditionally banks have take a conservative approach when assessing income for the self-employed.
Banks like certainty. Consistent income that you get from a salary is easy for banks to calculate your income from and determine your borrowing power. Not all business owners pay themselves a salary, and even when they do they often minimis the salary component of their income.
So how do banks assess self employed income?
There a few main categories or self employed borrowers
Sole Trader:
Defined as a single operator that remains wholly responsible for the business income. Whilst Sole Traders have an ABN their business income is declared in their Personal Income Tax Return.
Contract Workers:
Many employers now hire personnel using individual contracts. A good rule of thumb is that if your employer does not pay your superannuation contributions, sick leave or annual leave, then you are likely to be assessed as self-employed.
Partnership:
2 or more business owners who share profit of the business in line with their percentage ownership. The Partnership would normally lodge annual income tax returns and may also report business financials such as balance sheet and profit & loss statements. Partnerships usually distribute all income to partners annually.
Company Director:
1 or more business owners who share business profits in line with percentage ownership. Similar to partnerships. The main difference is the Company may be run one individual verse run line with ownership percentage. Companies may also retain profits and distribute these to the Directors as dividends in future years. Companies can pay their Directors a PAYG salary.
Trusts:
Usually established for asset protection and tax effective structures. Depending upon the rule of operation the trust may have discretion on how much money is paid to members each year. Trusts do not retain their profits and typically distribute all income every year.
If you are receiving income from any of the above structures the banks will consider you as self employed and use this income for home loan borrowing power.
In order to get the best rates, most lenders will want to see two years history of earnings and then average the income over a two year period to assess your income.
Not all lenders are the same when it comes to self employed home loans. Some banks specialise in this area and have unique policies to assist this market.
Small business accounts for approximately one third of the Australian economy and are vital local communities and employment.
Here are some of the things banks look for with self-employed home loans
- How long has the ABN been in place. If 2 years or more this is the best position. There are still mainstream lenders that may consider when the ABN has been in place for only 6 months or 12 months ABN
- The consistency of income. Very few businesses have the same profit year on year and banks expect variation. Consistent profits generally offer the simplest approval. Where there is one year substantially better than the other some lenders will still consider. Having recent ABNs can help prove the current higher income is consistent an ongoing
- Company control. If you are not the majority owner of the business some mainstream lenders will still consider you eligible
- Business debts. It is common for Companies to have liabilities to purchase Motor Vehicles, Plant & Equipment. Most lenders will reduce borrowing power by including these liabilities if ongoing. Others will not consider these at all
- Other income banks will consider is Instant Asset Write-off, Depreciation, Interest Expense and Excess Superannuation Contributions. Some lenders will add these items back to income, but not all
- ATO Debt and GST liabilities. Generally most banks will not lend if there are ongoing liabilities to the ATO. The tax office payment plans are often over a 2 or 3 payment plan and can be draining on income. Some lenders will allow you to refinance your home loan with a cash release to pay out the ATO debt
Self Employed are often the most rewarding loans we do. Having the knowledge of constantly changing lender policy, having options to present and making the process less daunting are all areas Bloom Home Loans specialises when dealing in home loans for self employed.
Discover if you qualify
We can help you refinance your home loan.
