If you’re self-employed and dreaming of a new home, you might want to pay extra attention this tax season.
The journey to securing a home loan can present unique considerations for individuals who manage their own enterprises.
Understanding how various financial activities, particularly those related to taxation, influence lending assessments is crucial for these aspiring homeowners.
For millions of Australians, especially those running their own businesses, the path to home ownership is getting bumpier—and your next tax return could be the key to unlocking (or slamming shut) the door to your dream property.
The self-employed squeeze: Frank’s story
Take Frank Farrelly, for example. Frank’s been running a successful dental practice in Sydney’s Darlinghurst for eight years.
He and his husband, a lawyer, are raising two young kids in a snug one-and-a-half-bedroom terrace.
Like many families, they’re hoping to upgrade to a bigger place with more room for the kids to grow.
But despite their double income and healthy savings, Frank and his husband hit a wall when they applied for a home loan.
Their broker told them the maximum they could borrow was $3 million—half a million short of the $3.5 million they’d hoped for.
The reason? As a self-employed applicant, Frank is seen as a ‘riskier’ bet by lenders, especially in today’s uncertain economic climate.
‘It is harder to get a mortgage and it’s based on income over a much longer period,’ Frank explains.
‘Staff wages have gone up, costs of everything else have gone up, but it’s hard for us to justify price rises. At the same time, we’re getting fewer people through the door. Business conditions are poor, which I think is across the economy in general.’
Why are lenders so cautious?
Frank’s experience isn’t unique. According to Great Southern Bank, 40 per cent of people believe it’s harder to get a home loan as a small business owner.
The main hurdles? Unpredictable income, stricter lending criteria, being labelled ‘high risk’, and the headache of gathering all the necessary paperwork.
Marina Michael, a mortgage broker who specialises in self-employed clients, says every bank has its own appetite for risk.
‘Traditionally, especially before COVID, every lender was looking at a minimum of two years of financials, including tax returns, company tax returns, and your notice of assessment,’ she says.
Why the caution? Historically, many small businesses don’t make it past the first two years, so lenders want to see a solid track record before handing over a big loan.
A glimmer of hope—but only for some
There’s a bit of good news: a handful of lenders, including Commonwealth Bank, have recently relaxed their policies for self-employed borrowers.
Some will now consider just your most recent year’s financials, rather than two. But these lenders are still in the minority, so most self-employed Aussies will need to show two strong years of income.
According to the Australian Bureau of Statistics, about 15.7 per cent of working Australians are self-employed. That’s a lot of people potentially facing extra hurdles at the bank.
Tax time: Make or break for your mortgage dreams
If you’re self-employed and thinking about buying property in the next 18 months, this year’s tax return is crucial.
Marina Michael urges you to talk to your accountant and mortgage broker now. ‘Get this tax return right because this is the tax return you are going to use for the next year to year and a half,’ she says.
Having two strong years of financials ready will keep your options open. If your numbers are a bit wobbly, you might consider a ‘low doc’ home loan, where banks accept recent BAS statements, business bank statements, and an accountant’s declaration instead of the usual paperwork.
But beware: these loans often come with a 1 to 1.5 per cent higher interest rate.
‘It depends on what’s more important to you—getting into the property market earlier, or waiting for your financials to look good,’ Marina advises.
Business structure matters
Another tip: your business structure can affect how banks assess your application. Sole traders and company directors are often treated differently, so it’s worth discussing your setup with your broker or accountant before you apply.
Tips for self-employed homebuyers
- Get Organised Early: Start gathering your financial documents well before you apply.
- Work with Professionals: A good accountant and mortgage broker can make all the difference.
- Consider Your Timing: If your business had a tough year, it might be worth waiting until your financials improve.
- Explore All Options: Ask about low doc loans, but weigh up the higher interest rates.
- Review Your Business Structure: The way your business is set up could impact your borrowing power.
The bottom line
For self-employed Aussies, the road to home ownership is a little rockier, but not impossible. With careful planning, the right advice, and a bit of patience, you can still get the keys to your dream home.
Have you faced challenges getting a mortgage as a self-employed Aussie? What tips or stories can you share with others in the same boat? Let us know in the comments below—your experience could help someone else navigate the journey!
Also read: Are mortgages about to go up? What Australia’s slowing economy means for you
