Self-employed borrowers are mostly declined for how the application was built and which lender it went to, not for being self-employed. Every lender reconstructs business income differently, and which recipe gets applied changes the assessed figure.
Every week someone sits down in Burwood or Cabramatta and opens with “I’m self-employed, so I know it’s going to be hard.” Sometimes they’ve already been declined. Sometimes their accountant told them not to bother for another year. And most of the time, when I look at the numbers, the application had been built the way a PAYG application gets built, and it was put to a lender that reads self-employed income the least generous way possible.
Here’s the opinion in one line: self-employed borrowers mostly get declined for being presented badly.
What a lender is actually worried about
A lender wants to know your income is real and that it will keep arriving. For an employee, a payslip does both jobs. For a business owner, the lender has to reconstruct it from tax returns, financial statements, BAS and bank statements, and every lender has a different recipe for doing that.
The recipe is the whole game. Some lenders take the lower of your last two years’ income. Some take the average. Some take the most recent year if it’s higher, with a cap on how much growth they’ll accept. Some will add back depreciation, interest on business loans and one-off expenses. Some won’t. Some will work off one year of returns plus BAS. Some want two full years and won’t discuss it.
Same business, same accountant, same two tax returns, and the assessed income can come out very differently depending on which of those recipes gets applied.
What goes wrong most often?
Minimising tax and then applying for a loan. Your accountant is trying to keep your taxable income down. A lender is trying to lend against your verified income, which starts from that same return. Those two things pull in opposite directions and nobody warns you. If you’ve spent two years writing everything off and then want to borrow, the returns say you earn very little. Some lenders will add back some of that. Most won’t add back all of it. The fix is a conversation with your accountant before the returns are lodged about what the next year or two need to look like if a loan is coming.
Applying too soon after a structure change. Moving from sole trader to company, or setting up a trust, resets the clock at a lot of lenders. They want to see income under the new structure. If a purchase is on the horizon, the timing of a restructure matters.
Personal and business money in one account. It makes your living expenses look enormous and your income look erratic. Lenders assess living expenses against the Household Expenditure Measure and against your statements, and if the business’s cost of goods is running through your personal account, the statements are going to say you spend a fortune.
Debts that shouldn’t be in your name. An ATO payment plan, a business vehicle on a personal lease, a credit card used for stock. Each one can count against your capacity. Structured differently, some of them wouldn’t.
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Going to one bank. A branch has one recipe. If that recipe reads your income badly, the answer is no, and nobody tells you that another lender’s recipe might have read it differently.
What structure means
The business structure: how the income flows and who it’s paid to, and how that lines up with the entity applying for the loan.
The application structure: which lender, which income verification method (full doc with two years of returns, or one year, or BAS-based, or an accountant’s declaration where a lender allows it), what gets added back, and which debts sit where.
The loan structure: whether it’s one loan or split, whether an offset account is attached, whether the business debt and the home debt are kept separate so one doesn’t contaminate the other on the next application.
Get those three right and a self-employed application is more work up front than a PAYG one and no harder otherwise. The work has to be done before the lender sees the file, because the lender only ever sees the version you send.
When should you start planning?
If you’re planning to buy in the next year or two and you run a business, the useful conversation is now. It’s a conversation with your accountant and your broker in the same room, or at least the same email chain. What the returns need to show. Whether the structure needs to change and when. Which lender’s recipe suits the business you actually run.
We do that regularly and it’s the most useful hour a self-employed borrower can spend. It’s also an hour that costs you nothing directly, because the lender pays us if a loan settles. If you’ve been declined, or told to wait, bring the decline. The reason is often in the presentation, and often that’s fixable.
Book a time with one of the brokers or call 02 9037 2825.
This is general information only. Whether a business structure change suits your tax position is a question for your accountant.
Frequently Asked Questions: Self-Employed Isn’t the Problem, Your Loan Structure Is
How many years of tax returns do I need for a self-employed home loan?
Two full years is the common ask. Some lenders will work with one year plus BAS, or an accountant’s declaration. It varies by lender, which is the point.
Does minimising tax hurt my borrowing power?
It can. Lenders assess verified income that starts from the same return your accountant is minimising. The fix is planning the two before the returns are lodged.
Can I get a home loan with one year of self-employment?
With some lenders, in some circumstances. It depends on the industry, the structure and what the BAS shows. Nobody can promise it before assessing the file.
Related reading
- The 5 C’s of Credit, Explained
- Loyalty to Your Bank Is a Tax on Your Future
- The Fixed-Rate Cliff Is an Opportunity, Not a Crisis
- More on self-employed home loans
Book a broker or find a broker near you. Or call the Burwood office on 02 9037 2825.
General information only. This article does not take your objectives, financial situation or needs into account, and is not financial product, tax or legal advice. Lending criteria, fees and rates vary by lender and change without notice. Loan Lounge, Australian Credit Licence 515608.