Running your own business is great for freedom, but it can make getting a home loan harder. Rates are at their highest in years, and lenders are looking closely at every income.
Can you get a home loan when you are self-employed?
Yes, you can. Thousands of sole traders, contractors and business owners get approved every year. The difference is in how your income is proven. A payslip is simple. Business income takes more paperwork and a bit more planning.
How lenders assess self-employed income
Lenders want to see that your income is steady and likely to continue. They mostly look backwards at your tax returns to judge this.
Most lenders use your last two years of personal tax returns and notices of assessment.
Many take an average of the two years. Some use the lower year if your income has dropped.
Business owners often also need company or trust financials, such as a profit and loss statement and balance sheet.
Lenders usually want to see at least 12 to 24 months of trading under the same ABN, though some will look at less with the right profile.
The key point is that lenders assess your taxable income, not your turnover. If your accountant has legally reduced your taxable profit with deductions, your borrowing power is reduced too.
Which income counts and which does not
Lenders do not treat all business income the same way. Here is what they commonly look at:
Your taxable salary or drawings from the business.
Your share of net profit if you are a sole trader or partner.
Add-backs, such as depreciation, interest and one-off expenses, which some lenders allow.
Company profits that stay in the business, which many lenders count only in part.
Add-backs vary a lot between lenders. This is one of the biggest reasons the same borrower can get very different results from two banks.
Full doc, alt doc and low doc loans
There are three common paths for self-employed borrowers.
Full doc loans: You provide tax returns and financials. This is the standard option and usually has the lowest rates.
Alt doc loans: You use other evidence of income, such as an accountant's letter, business activity statements (BAS) and business bank statements. These suit people who have not lodged recent returns.
Low doc loans: These rely on a self-declaration of income backed by BAS and bank statements. They are offered by a smaller group of non-bank lenders and usually cost more.
Alt doc and low doc loans can be a good bridge. Many borrowers use them for a time, then refinance to a full doc loan once their tax returns catch up.
The documents you will likely need
Getting your paperwork ready early speeds up approval. Most lenders ask for:
Two years of personal tax returns and notices of assessment.
Two years of company or trust tax returns and financials, if you operate through an entity.
Recent BAS statements.
A year to date profit and loss statement.
Personal and business bank statements.
Evidence of your ABN and how long you have held it.
A letter from your accountant confirming your income, in some cases.
Lenders also check your bank statements closely. Our guide on what banks look for in your bank statements explains what they notice.
Common things that cause problems
Self-employed applications usually hit trouble in the same few places.
Tax debts: An unpaid ATO debt or an active payment plan can affect your application. Many lenders want it cleared or well managed.
Late lodgements: Tax returns that are not up to date limit your options to alt doc lenders.
Falling income: If your latest year is lower than the one before, lenders often use the lower figure.
Mixing personal and business spending: Messy accounts make it harder to assess your real position.
Short trading history: Under 12 months with the same ABN narrows your choices.
If your borrowing power looks lower than you expected, our guide on why your borrowing capacity may be lower than expected covers the usual reasons.
How to improve your chances
A bit of planning before you apply can make a real difference.
Lodge your tax returns on time and clear any ATO debts.
Speak to your accountant about timing. Heavy deductions lower your taxable income.
Keep business and personal accounts separate.
Build up your deposit and show regular savings.
Reduce credit card limits and other debts you do not need.
Avoid applying with several lenders on your own, as each enquiry shows on your credit file.
Why the right lender matters
Policy for self-employed borrowers differs more than for almost any other group. One lender may average two years of income. Another may accept add-backs for depreciation. A third may be happy with a shorter trading history. Rate rises have also tightened serviceability for most borrowers, so lender choice matters even more now.
A broker can compare these policies for you before you apply. That avoids a decline on your credit file and finds the lender that treats your income best.
Ready to Borrow as a Self-Employed Applicant?
Every business is different, so talk to us about yours. We will look at your income, your documents and your timing, then match you with a suitable lender.