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Self employed and looking for a home or business loan?
If you're a self-employed individual seeking a home or business loan, we've got some pointers for you.
Andrea Rowlands
04 August 2023
Please Note: This newsletter was originally published on 4th August 2023. While the information presented here may still be valuable, some aspects may be outdated.
The belief that bank lending for self-employed individuals is tough and hard to obtain might have you wondering how to secure your own home. Well, don't worry, because we're going to break it down for you here.
Let's start with the most common question:
How do lenders and banks calculate income for self-employed individuals?
It all comes down to proving consistent taxable income to the bank. Forget about gross sales; what truly matters is your sales minus cost of goods, minus expenses. But here's the good part – we have some flexibility when it comes to considering expenses. We often request to 'add back' certain non-cash expenses, like depreciation, as they don't involve actual money spent. Similarly, in some cases home office expenses can be added back as well.
It’s not a black and white process, and you'll need to have a good mortgage broker that understands these intricacies to be able to break it all down effectively.
Banks usually prefer an average of the last two financial years, but some may accept just the last one year. Given the rollercoaster ride businesses have experienced over the past three years, it's crucial to explain how things are expected to go moving forward.
Don't have two years of good financials?
Now, let's talk about low-documentation loans for self-employed individuals. While these aren't as common with main banks, some second-tier lenders still offer them. A low-documentation loan requires minimal proof-of-income documents, often just a one-page letter from your accountant estimating your income for the year. This type of loan can be beneficial if you have a solid deposit but have only recently started trading or took some time off, resulting in a less impressive previous year but promising future prospects.
Don't have an accountant? No problem!
If you're contracting with only one or two businesses and have minimal expenses to claim, we'll typically request your Inland Revenue submissions from the last two years. The income after expenses will be averaged out, and we'll also check recent business bank statements to ensure income consistency.
Do you have a side hustle?
For those juggling a side hustle while working full-time, here's some good news. Side business income, whether it's from online ventures, weekend markets, or even Uber driving, can boost your chances of getting a home loan approval. For this to be effective, this income needs to be consistent and ongoing (with taxes paid). Banks usually look for at least a year of operation to ensure long-term viability and profitability.
Business Loans
Now, let's touch on business loans. Traditionally, these are heavily backed by residential property, although it may not be the most ideal approach. While getting an unsecured business loan isn't easy, there are now options available for businesses that have been trading for over 12 months.
If you have any questions or need assistance with your home ownership or business goals, don't hesitate to book a free, no-obligation call with a Tella mortgage expert today.
In the meantime, feel free to share this post with any of the other 364,599 self-employed individuals in NZ (According to MBIE stats for March 2023).
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