Are Self-employed loans easy?

Self Employed loan criteria are slightly different from PAYG loans. Most of the lenders require you to be self-employed for at least two to three years. There are few lenders who still consider one year term for self-employment. Conditions do apply for a one-year self-employment loan.

Self-employed for less than a year?

Why banks avoid short term self-employed clients?

Banks hesitate to lend for short term self-employed due to

Not many tax returns to prove income.
New ventures have more financial uncertainty
Easy access for temporary alterations to get a loan

However, there are few lenders who deal with these loans if we explain

Your income from your last job and take that as proof that you can afford the loan.
clients qualifications, ability, and experience in the same field.
If a business needed to close down, the client can return to working for someone else on a similar salary.

Explaining this scenario can help you borrow up to 80% of the property value.

Self-employed for one to two years?

Lenders can approve loans for people who have been self-employed for between one and two years only

If they have been in the same line of work for some time and
Provide at least one year’s financials for the new business.
Provide the same industry experience.

Such as an Electrician who has been working for a few years starts his new business.

Assessment of income?

Banks calculate the income for self-employed borrowers according to their own criteria and do not take the potential of a client into the account.
We can communicate with the bank and make sure they assess the loan correctly. We can prepare documents to avoid common mistakes like;

Lack of understanding: Complex trust structures with multiple companies and trusts are often handled by bank staff that lacks the experience to understand the income structure. eg: income protection payments. In such cases, Additional documents from an accountant can help such cases being refused.

Double dipping: Some time assessor’s get confused and calculates income into account twice (e.g. Net Profit Before Tax and also accepting the dividend paid to a director) or takes an expense into account twice (e.g. Lenders forget to add back interest on loans).
Company car: Lenders regularly ignore the benefit a self-employed person receives from tax deducting their car expenses in their company. This can be beneficial by reducing living expenses to support the application.
Unusual Delay: On a complex or complicated loan application, the bank staff may take more time than routine to go through the assessment. We understand their preferences and by supplying additional information in advance, we can get things done quicker.

Calculate Self employed income?

Most lenders make a prediction of the income by looking at your past tax returns.
Lenders take a brief note of the variation in income over the last two years.

Some lenders may use the lowest of the income figures for the last two years.
Another may use the most recent year’s income as shown on your tax return.
Some lenders average the two years income or take 120% of the lowest year’s income.
They may or may not then add back expenses shown on your returns.

Choosing the right lender makes a big difference to your loan application. Every lender has their own way to interpret your tax returns.

Lenders assessment for your income depends on;

Look at your skills as an entrepreneur,
Your experience in the industry and,
The risks profile of your industry.
Your Business Activity Statements (BAS),
An Australian Taxation Office (ATO) tax latest information and
Bank account statements for the last three to six months showing a turnover of your business.

We specialise in Self Employed loans and have a good experience dealing with specific lenders. Get in touch for more information.

Why banks don’t favour self-employed?

Self-employed clients often do have a variation in income. The reason is business is never stable every year. Lenders consider it as a risk and therefore are more cautious.

According to their past experiences, banks favor particular trades and industries compared to others. The reason may be higher levels of default over the years from particular industries so tend to be more conservative when lending to them.

This is the reason banks go through the micro assessment for business owner applications. Well, we all know there are so many new successful ventures and heaps of business trading in the country successfully for so many years.

We believe that one size does not fit all and present your file according to lenders criteria.

Self-employed tax returns vs Lenders

Some lenders have their income figures different from other lenders. Yes, that’s’ right and the reasons are

Not all lenders add depreciation
Not considering your “add-backs”
Ignoring your extra superannuation contributions.

So the lenders do show a large difference in the way they assess our tax returns! Lenders also have different documentation requirements

For a company
Trust
Partnership
Sole trader.

According to the risk of the application or income of the business, banks may request interim financials or cash flow projections.

How recent are your tax returns?

You do not always need to provide the latest tax returns if you have not lodged them yet. Lenders do accept previous year tax returns till the end of March and some lenders even till the end of April. Let’s say if you applied in January 2019 most lenders would require your tax returns for 2016 and 2017, however in March 2019 most lenders would require 2017 and 2018 returns.
Some lenders can accept older tax returns out of their existing policy. This can be helpful for people who have failed to lodge their recent tax returns.
We have lenders on our panel which requires one years’ tax returns for assessment. This can be helpful for new business starters or for self-employed who did not earn much in the previous year.

Some lenders accept “add back” as an Income

The self-employed income assessments are complicated and tricky. Your actual income showing as a gross income is not your only income which you can use for repayments. The few types of expenses are also calculated as a part of income. One time expenses are not to be occuring periodically and the client may gain benefits from these investments in the future.
The add-backs considered by lenders are but not limited to:

Depreciation: Depreciation is a tax deduction, however, it isn’t a day to day expense. For this reason, some lenders add it back to your taxable income.
Additional superannuation: If you’ve made lump sum contributions to super in excess of your minimum requirements then these can be added back.
Net Profit Before Tax (NPBT): The profits retained in the company have to be considered as an income. In case, you own a share in a company, then the part of your income according to the ratio of the share will be considered as an income.
One-off expenses: These types of expenses are extraordinary expenses that occur only once in a few years time. Such as buying a machine to increase productivity and income. we can add this into your part of income. We may need an accountant letter to confirm this.
Interest expenses: If you have a business loan or investment loan then it’s likely that you have tax deducted the interest that you have paid. We can add this back as lenders will assess all commitments that you have separately in their serviceability calculator.
Rental property expenses: Depreciation on your properties, management fees, repairs and other rental property deductions such as negative gearing are all added back. Rent income is also deducted from your income as lenders assess this separately to your main income.
Company car: If you have a car that’s used by your business and yourself then it’s likely that you have tax deducted many of the expenses associated with this car. Lenders don’t add this back, however, they’ll often add in an extra $3,000 to $6,000 in income to compensate for this.
Trust distributions: If you have your business in a discretionary trust and have chosen to distribute income to some of your family members then in most cases this can be added back. Note that many lenders don’t accept this add back, or will only do so if you provide a letter from your accountant to confirm that the beneficiaries aren’t financially dependent on this income.

Low doc options

Low doc loans are another option for self-employed who do not have their financials up to date. There are few lenders who can process your loan application a client confirms their current and projected income by signing a declaration. The application is then serviced based on the declared income.
Please note that all the major banks do avoid Low-Doc loans. But there are few private lenders who still deal with low doc loans. Low doc loans means higher level of risk as compared to full doc loan loans therefore

A client has to pay LMI( Lenders Mortgage Insurance)
Some lenders also charge account set up fees
Fees vary for 20% and more than 30 to 40% deposit categories

Please note all the mortgage brokers do not deal with low doc loans as a broker has to be covered by his liability insurance if high-risk loans are to be written.

Echoice finance are experts in Low Doc loans. Share your scenario to us.

Avoid business banking

Business banking is often offered by the banks you are dealing with. You may be encouraged to open an account on your company name, a trust or partnership to receive extra facilities through business banking. It is better to avoid business banking if you are looking for a loan in the near future.
Lenders do not consider genuine savings that are in your business account. It is your money but the same bank will avoid considering it as an income proof.
There are few lenders that consider company income and provide a loan at standard residential rates.
These lenders certainly need more information and documents about your company or trust. Interest rates offered by these lenders in such cases can be little higher too.

Apply for a home loan

Self-employed and looking for a loan! Please discuss your scenario with us.

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Self Employed Home Loan