It seems patently unfair when you’re a successful business owner and you’re making decent money, and you go to the bank for a home loan only to be told that you don’t qualify. Then you learn about friends of yours who are employees (rather than self-employed), you suspect they earn less money than you do, but they get given a loan instantly by the bank. What gives!?
Being a business owner (and a successful one at that), you figure that you know how to manage money better than most, and surely managing your own business finances successfully should see you as being a safe bet for being able to manage your home loan repayments?
Unfortunately, in our current era of litigiousness, protecting oneself trumps common sense, meaning that despite you proving through your business ventures that you know your way around a dollar, the bank has to essentially prove you’re not financially illiterate before it will lend you money.
But what does a financially illiterate business owner look like? Well, before we get into that, let’s have a quick refresher on bank policies when it comes to lending.
There’s rental income shading, bonus shading, annualising income, servicing buffers on credit cards, increased debt loading for other loans, and buffers placed on your own loan as well. What does it all mean? Essentially, the bank wants to make sure that under the worst circumstances possible, that you will still be able to make your home loan repayments. If the poo hits the fan, the bank wants to be in the clear, and they do this by stress testing every single deal that comes across their desk.
So what do the worst circumstances look like for a couple of PAYG employees then? Probably having a couple of cards maxed out, interest rates rising a bit, and them spending more on living expenses than they do normally.
But what do the worst circumstances for a business owner look like? Your income could drop significantly, after all, when you’re the boss and have to pay yourself last. You pay more tax as a business owner, so these liabilities have to be considered. Most businesses also have a few debts inside them, either for cashflow purposes, or on the advice of the accountant, so these need to be accounted for too. Very simply put, it is possible for more to go wrong for a business owner, than is possible for an employee who can walk away from a job and get a new one.
Unfortunately, having more money in your hand at the end of the day doesn’t always mean it’s easier to borrow money. For most people, they have no idea how income is assessed when it comes to a home loan until they actually go through the process. This isn’t terribly surprising, as buying a home whether it’s for owner occupied or investment purposes is something that the vast majority will only do a handful of times in their whole life.
Thankfully though, some lenders do have more relaxed policies around lending to the self-employed, and you don’t get punished simply for having the drive to work for yourself rather than someone else. They will look at your most recent years’ results rather than taking the lesser of the last two years, and you can always add back depreciation to your income, thus ensuring that the tax minimisation strategies you’ve put in place with your accountant aren’t going to negatively impact you when it comes to you applying for a home loan. If you’re self-employed and you want to know how a lender will treat your application, get in touch with us and we’ll walk you through it.