How do lenders calculate your self-employed income?

Many lenders will need to look at your past two years of tax returns and financials to determine your income for loan servicing purposes.

Lenders differ in the way they look at your financials and income, for example:

• One lender may use the lowest of the income figures for the last two years.
• Some average the two years income or take 120% of the lowest year’s income.
• Another may use the most recent year’s income as shown on your tax return.
• Addbacks shown on your returns may or may not be accepted by lenders when calculating your annual income.

You can see that the above makes a big difference to your borrowing capacity. We at hfinance specialise in finding the lender that will look at your business in a fair and reasonable way.

What is an “add-back” and how can you use them to increase your borrowing capacity?

As a business owner, your taxable income alone isn’t the same as your overall income that you can use to service a loan. Many lenders allow add-backs to your income. These are expenses that you’ve incurred that reduced your taxable income for the business.

Some examples of add backs are:

• Depreciation: Depreciation is a tax deduction therefore isn’t a day to day cash expense.
• Wages Payments to directors: If you have paid yourself a wage, income from the business to the director, this can be factored into the company income.
• Interest expenses: If you have a business loan or investment loan then you add back the interest.
• Additional superannuation: If you’ve made contributions to super more than your minimum requirements, the extra amount is included as an add back.
• Net Profit Before Tax (NPBT): If you have profits that you’ve retained in your company, the funds may be used as part of your income.
• Rental property expenses: Depreciation on your properties, management fees, repairs and other rental property deductions such as negative gearing are all added back.

As you can see, this can get quite complicated! At hfinance, we are experts in this area of lending.

Applying for a self-employed home loan

If you’re self-employed and looking to get finance, don’t hesitate to speak to us today!

However, keep in mind that it’s best to apply for a home or investment loan when you feel your business is stable.

This is something that both us and the bank can’t assess, you’d need to determine this for yourself.

COVID and the impact on your home loan application

COVID has had huge implications on small and medium businesses in Australia and globally. This has impacted some sectors ability to generate revenue and in turn has created many profitable businesses to post losses and require government assistance to survive.

Due to the impact, lenders are now requiring to see recent trading data from businesses, to confirm trading conditions are in line with previous years. For example a lender will use the 2019 and 2020 financials to determine borrowing capacty, but will also request a copy of recent BAS statements and YTD financial statements to compare to the current financial year.

If trading has deteriorated, it is important to mitigate this credit risk with other items on the application, this is something to discuss with your hfinance mortgage broker.