More than 2.4 million Australians are self-employed, including 1 million who operate as sole traders.
If you are one of these 2.4 million, you’ll know how rewarding it can be – more flexibility with your work hours, better work life balance, you get to choose who you work with, you have the option to work where you like, you have more control over your income, and there are possible tax advantages.
However, sometimes, it can be a little more challenging, especially when it comes time to buy a home. This is because you will need to demonstrate a stable income and continuity of employment and this can often be difficult.
That’s where we come in, here are our top tips to help you on your way to owning a home. With a few extra steps you can access the same loans and lenders as everyone else.
Good record keeping is essential. If you’re self-employed or you own your own business, you’ll know all about the challenges of admin – keeping your accounts, finances and income flow all on track. When lenders are looking at a home loan application, they are usually looking for a regular level of income that shows them you’re able to make the proposed repayments. Start by showing paperwork that tells them you’ve been self-employed for an ongoing amount of time and that you earn a regular amount each month.
Up to date tax return
If you are a free-lancer, self-employed or contract temporary worker you need to be able to demonstrate a history of your income by way of your tax return. Banks want to see that a business is profitable – have your tax returns up to date, show that you’re earning a profit. The lower your taxable income, the lower your borrowing capacity will be.
Get help – make sure you have a good Accountant
If your goal is to purchase property in the next 12 months, talk to your accountant, you may need to maximise your income on your tax return. One of the biggest challenges self-employed people and small business owners face is their taxable income. The thing to think about when you address this question for your business is how your financial statements today will impact your borrowing options in the future. Talking to a financial adviser or tax professional about your goals (like buying a house) when you work out your taxable income is an important step.
Using a financial plan to manage cash flow can be really good for people who are self-employed. Paying off any outstanding debts such as credit cards or personal loans will positively impact your cash flow, and potentially your credit score, which may also mean you’ll qualify for a higher loan amount with some lenders.
Present information that is easy to understand. Simplify your business structure – don’t overcomplicate your business affairs.
Talk to your broker – trust their experience
From the get-go, it’s really important to be upfront about what’s been going on in your business. This is particularly important if there are any large variations, up or down, in the taxable income shown on your annual financial statements from one year to the next. You may need to explain these fluctuations.
Talk to us, be truthful. Lenders will look at your total income over the last 12-24 months, it doesn’t matter if its irregular, they want to see consistency.
Alt Doc Loan
Given that it is sometimes a bit of a challenge to provide all the paperwork you need to document your income, some lenders have worked out a different process for it – it’s called alternative documentation (Alt Doc for short). It is specially designed to meet the needs of self-employed or small business owners who can’t provide the income documentation required by traditional lenders and mortgage insurers but can still provide valid information, just with different types of paperwork.
This can include:
- Has your business been ABN registered for at least 6 months?
- Has your business been GST registered for at least 6 months?
- Business Activity Statements (BAS), and/or
- Business Bank Account Statements, and/or
- An Accountants Letter.
These are some ideas to help get you started on your loan application planning. There are many options for self-employed people who are looking to get a home loan but haven’t been successful with the banks.
Contact us as soon as you start to think about owning property and we can work out a plan to help your application go as smoothly as possible.
The above information is general in nature. It has been prepared without taking into account your objectives, financial situation or needs.