Truth or Myth “Self-Employed individuals will pay a higher interest rate?”
From our experience, we have found this to be a myth. If you can demonstrate a consistent income over a 1 to 2-year period, you are more likely to be assessed equally to any other home loan applicant.
In a situation where you are self-employed and you plan to purchase a property in the future, it is paramount that you establish a financial plan around you which shows a constant and stable income stream. Getting this right early will undeniably pay off in the long run.
Having cleared the air on the myth, we can provide some simple tips that will help boost your application with the lender.
WHEN TO APPLY FOR MORTGAGE AS A SELF-EMPLOYED APPLICANT?
As a general rule, if you are a start-up business, don’t apply for a loan straight away. Lenders usually require at least one to two years trading history.
Trading history provides the lenders assurance in knowing that your business is established and has a proven financial track record. An accounting practice which is often used by self-employed applicants is tax minimisation techniques to reduce their business taxable income.
From a tax perspective, this is a sensible approach, however the result is a lower overall income, which depending on your specific income level can work against a mortgage application.
ADDING YOUR PARTNERS INCOME TO THE LOAN
If your partner does not work in the business, and they have a permanent job, adding them to the application will increase your financial position.
Where your partner works in the business and is on the payroll, then your partners wage can be included in your financials. The lender will require evidence of this income. Therefore issuing pay slips, collecting PAYG withholding tax on their behalf, will provide lenders a comfort in knowing that your partner is being paid a consistent and accurate wage.
LODGING AND PAYING YOUR TAXES
Completing, and submitting your business and personal tax returns in a timely manner can also assist when it comes to application time. Lenders will generally always ask for your last two years personal and business tax returns as well as notice of assessments.
For newer businesses, there are some lenders who are prepared to accept financials for 1 year.
As small businesses form most taxpayer debts, Australian taxation office now discloses business tax debt to credit reporting bodies such as Equifax. These credit reports are what lenders use to assess your creditworthiness.
As a result, by not paying your tax debt, there is a strong possibility that it will appear on your credit report.
CAN ANY OF MY COSTS BE ADDED BACK?
Absolutely. Majority of lenders will allow add backs for interest, depreciation, director’s salaries or wages and superannuation. These add backs can be very positive, particularly to those businesses that have heavily depreciated or financed machinery expenses.
Reducing as much of your consumer debt by paying out or eliminating, personal loans, car loans or credit cards can positively boost your borrowing capacity.
Reducing the amount of monthly credit commitments that you have can helps boost the amount of discretionary income that you have available. This discretionary income is what the lenders use to calculate your borrowing capacity.
FIND THE LENDER THAT BEST SUITS YOUR NEEDS
Having a meeting with one of our Brisbane Home Loans Mortgage Brokers allows us to obtain a full understanding of what your current situations is and what your goals are.
This information assists us in narrowing down the possible lenders that are best suited to your specific needs, ensuring that you end up with the right product, quickly and without stress or fuss.