Self-employed borrowers are not riskier than employees. They are just harder to assess, and lenders price and police that difficulty differently. Knowing how each one reads your file is most of the battle.
Why it is harder, and what lenders are actually worried about
A salaried applicant hands over two payslips and the income question is settled. Self-employed income has to be reconstructed from tax returns, financial statements and business activity statements, and then judged for whether it will continue.
That is the real concern. Not that you earn less, but that the lender cannot easily prove what you will earn next year. Everything below follows from that.
The tax problem nobody warns you about
Here is the bind most self-employed borrowers walk into without realising.
A good accountant minimises your taxable income. That is what you pay them for. But a lender assesses you on that same taxable income. Every deduction that saves you tax also reduces what you can borrow.
The practical consequence is that if you are planning to buy in the next two years, that is worth raising with your accountant now rather than after the fact. Lenders generally look at the most recent two years, so the returns you lodge this year and next are the ones that will be assessed. You cannot retrospectively undo an aggressive deduction once the return is lodged.
This is a genuine trade-off, not a trick. Less tax now, or more borrowing capacity later. It is worth making that choice deliberately.
Add-backs, and why they matter more than people expect
Lenders will add certain items back to your taxable income, because they are not real cash costs or are one-off. This is where a well-presented application does considerably better than a poorly presented one.
Commonly considered add-backs include:
- Depreciation, since it reduces taxable income without money leaving the business
- Additional superannuation contributions above the compulsory rate
- One-off or non-recurring expenses that will not repeat
- Interest on debts that are being refinanced or repaid as part of the application
- Net profit retained in the company, in some structures
Lenders differ substantially on which of these they will accept and how much evidence they want. An add-back one lender treats as routine, another will refuse outright. That variation is a large part of why the same file gets very different answers at different lenders.
Full doc, alt doc, and which you actually need
Full doc is the standard route. Two years of tax returns and financial statements, assessed conventionally. If you have been trading a while and your returns show the income, this is where you want to be, because the rates are the sharpest.
Alt doc, sometimes called low doc, exists for borrowers whose returns do not tell the whole story. Instead of full financials, lenders accept alternative evidence: business activity statements, an accountant’s declaration, or business bank statements over a set period. Usually you need at least one of these, and often two.
Alt doc costs more. Expect a higher rate and often a lower maximum LVR, meaning a larger deposit. It is a genuine solution to a genuine problem, but it should not be the first option if a full doc application would have worked.
The mistake worth avoiding is assuming you need alt doc because you are self-employed. Plenty of self-employed borrowers qualify on full doc terms and never find out, because nobody looked properly.
How long you need to have been trading
Two years is the common benchmark, and two years of returns is what most lenders want to see.
Some will consider one year, particularly if you were previously employed doing the same work and can show continuity. A tradesperson who worked for a company for eight years and then went out on their own doing the same thing is a very different proposition from someone who started a business in a field they have never worked in, even though both have twelve months of returns.
Where lenders land on that varies a lot. It is one of the clearest examples of policy differing between lenders rather than the rules being fixed.
Income going backwards is the hardest case
If year two is lower than year one, most lenders will assess you on the lower figure. Some will average the two, which helps. Almost none will use the higher one.
If there is a reason for the drop, and there usually is, document it properly. A year with a large one-off expense, a period of illness, a client that ended, a deliberate investment in the business. A short accountant’s letter explaining a decline is worth considerably more than leaving the assessor to draw their own conclusion, because the conclusion they draw in the absence of information is rarely generous.
Get your paperwork in order before you apply
- Two years of personal and business tax returns, lodged and assessed
- Notices of assessment from the ATO
- Business financial statements, profit and loss plus balance sheet
- Recent business activity statements
- Business bank statements, often six to twelve months
- ABN and GST registration details
Outstanding ATO debt is worth dealing with before you apply. So is a return you have not lodged. Both are common, both are fixable, and both will hold up an application at the worst possible moment.
Do not apply everywhere at once
Because lender policy varies so much for self-employed applicants, the temptation is to apply to several and see who says yes.
That is the worst thing you can do. Every application records a credit enquiry, and a cluster of enquiries in a short period is itself a red flag that makes the next lender more cautious. A decline also makes the following application harder. More on credit scores.
The better approach is to work out which lender suits your situation before anyone runs an enquiry, and apply once, properly, to that one.
That is the part we do for a living. We are mortgage brokers, so we compare across a panel of bank and non-bank lenders, and we know which ones read self-employed income well and which ones do not. Call us on 1300 899 724 or book a time to talk it through.
Common questions
How long do I need to be self-employed to get a home loan?
Two years of tax returns is the common benchmark. Some lenders will consider one year, especially if you were previously employed in the same line of work and can show continuity. Policy varies a lot between lenders on this point.
Can I get a home loan with one year of tax returns?
Sometimes. It depends on the lender, your trading history, and whether you can show the income is consistent with what you were doing before. It is more achievable than most people assume, but it narrows which lenders will look at you.
Do I need a bigger deposit if I am self-employed?
Not necessarily on a full doc application, where standard deposit requirements apply. Alt doc lending usually does require a larger deposit, often a lower maximum LVR than a standard loan.
Will my accountant’s tax minimisation hurt my borrowing capacity?
Yes, and this catches a lot of people out. Lenders assess your taxable income, so deductions that reduce your tax also reduce what you can borrow. If you plan to buy in the next couple of years, raise it with your accountant before lodging rather than after.
What is an add-back?
An item the lender adds back to your taxable income because it is not a real cash cost or will not recur, such as depreciation, extra superannuation contributions, or one-off expenses. Lenders differ on which add-backs they accept, which is a major reason the same file gets different answers.