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Self-employed? How do lenders calculate income?

Blog Image | Self-employed? How do lenders calculate income? | Green Finance Group
Blog Image | Self-employed? How do lenders calculate income? | Green Finance Group


Let's clear up the misconception of lending.

There is a common misconception that if you are self-employed obtaining a home or investment loan is difficult. It can be harder, but it isn’t always. In today’s modern workplace the fact is more and more people are self-employed and most lenders have adjusted their policy to suit demand it’s just a matter of knowing which lender’s policy will best cater to your situation.

Research is critical here as you might just be surprised as to what is available to you.

Working for yourself

When you work for yourself, you may pay yourself a consistent income, but, more likely, your earnings fluctuate month to month. You may have experience managing your personal cash flow to accommodate this, however lenders tend to look for stability and a track record of making ends meet. So, if you are self-employed and want to take out a home loan, how do lenders calculate your income when assessing your application?

Calculating Income

The way your income will be calculated will vary depending on the lender. For example, most lenders will require at least two years' tax returns from which they will calculate your average income. Some lenders may only use the lowest figure from the last two years, some may accept one years' tax return and it may be possible for some loan types to only require six months' pay slips along with a letter from your accountant.

The income on your tax returns isn't necessarily the final figure lenders will consider. They could also look at the expenses that you've incurred that reduced your taxable income, but aren't recurring, and add these back. This can actually boost your overall income. The expenses that may be added back, depending on the lender, include:

  • Depreciation (such as on vehicles or investment properties)

  • Additional superannuation contributions you have made

  • Asset tax Write-Offs

  • Net Profit Before Tax that have been retained within the business

  • One-off purchases, such as a company car

  • Interest repayments for a business loan

Calculating Expenses & Leveraging of Expert Advice

There are additional expenses that could potentially be added back, which your finance broker can discuss with you.

If you have been running your business for more than one year, but less than two, there may be some lenders who will still consider your application. If your business has been operating for less than one year, it could be trickier as lenders like to see consistency with your income.

This is just one reason why it pays to consult a professional finance broker who knows bank policy from a range of lenders and can give you the insider’s scoop on which lender will provide the most favourable loan terms for your situation.

If you're self-employed and applying for a loan, you will likely need to provide more documents than someone who is an employee to demonstrate your dependability in repaying the loan.

Remember, a professional finance broker will know the ins and outs of the different lenders' requirements and can help you understand what options may be right for your unique circumstances so you can confidently move forward.

If you have any questions regarding property finance, and your lending ability or are

ready to purchase your next investment,

Please don't hesitate to contact your Property Strategist.

HLB Mann Judd - Advisory And Accounting | Property Related Article for Equity Rise
Equity Rise (pty) Ltd | Property Investments and Wealth Creation

Equity Rise,

Level 3, 31 Alfred Street,

Sydney, NSW 2000, Australia


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