As a small business owner you have already demonstrated a sense of entrepreneurship and you understand that success in business comes down to getting the details right – so it should be no different when it comes to choosing the right home loan.
The only real difference for a self-employed borrower to that of a PAYEE borrower is that it’s more difficult for a bank to work out whether you can afford to meet your mortgage repayments into the future. A PAYEE borrower provides one payslip to show their income while a self- employed person has a more complicated financial situation – there is no certain income and a bank will need to look at profit and loss statements, understand these and they are often up to 2 years old at the time of the application and may not even reflect what is happening now let alone into the future.
What many people don’t know that it is a legal responsibility of a lender to make sure that a borrower can afford the repayments a bank can’t just rely on the security of the house, so that’s why looking at your financial position is still important.
Here are our top 12 tips for self-employed home loan borrowers
1. Look for the best offer available
Don’t just go to the same bank where you have your savings or business account. Banks rely on this convenience factor and because they don’t have to try to win your business – you won’t get the best loan on offer.
2. Is your financial information up to date?
Have your last 2 years financial statements, income tax returns and notice of assessments up to date and ready. Banks rarely will accept financial statements that have not been lodged with the Australian Taxation Office.
3. Understand how you are being assessed
Understand that banks use different methods of assessment for self- employed people, some use the average of your last two years income, others the lower of the last 2 years while others use a variance method
4. Are you really self-employed?
Check to confirm that you are considered to be really self-employed, if you are a contractor or sub-contractor you may get away with being seen as an employee with some lenders.
5. What are your business add backs?
What are your business add backs? These will help increase the income a bank will use to determine if you can afford a loan and include:
– Car Allowance
– Interest Expense that is being refinanced or no longer exists
– Excess superannuation contributions
– Non-Recurring Expenses
– Non-Cash Expenses
6. Quarantine your loan purpose
Quarantine your loan purpose, as a self-employed person you are far more likely to be able to claim some of your interest as a tax deduction, so it’s important to make sure you set up the correct loan structure from the beginning. Getting this wrong at the start often means it’s too late and can cost you in the long run
7. Make your cashflow work for you
Make your cash flow work for you to save interest – consider a facility where you can “park” your GST payments before you need to remit them the tax office
8. What will the tax office do?
Understand that the tax office may use your lo-doc declaration as evidence of your income if they undertake a tax audit, so don’t just make a figure up as not only might it cause you a tax headache it could cause you financial hardship too.
9. Business load = higher rate?
If you have a business loan, the bank is probably going to charge you a higher rate interest rate and require annual reviews – which will cost you time and extra fees. Know that some lenders will lend for business purposes at home loan rates if you use residential property as security
10. Think about your future
Think about the future, assessing how your financial needs are likely to change might save you from having to re-work or re-structure your home loan regularly. We recommend you look forward 3 – 5 years
11. Credit History
Credit History, it has always been important for small business owners to protect their credit rating but with the implementing of positive credit reporting we believe this will become even more apparent and transparent in the future.
12. Is your home loan right for you?
Monitor cash flow and make sure your home loan is structured the right way for you to provide maximum flexibility.