When you are self-employed, lenders typically see you as a high-risk borrower. This isn’t personal. The reason this occurs is because the income of self-employed people typically fluctuates, unlike that of someone with a regular income.
Lenders will determine the size of the loan available to you based on a number of factors including your income based on your tax returns for the last two years. The bigger the income you demonstrate, and the more positive and consistent your cash flow is, the better your chances of having your application approved and receiving a larger loan.
Knowing that lenders look to your tax returns when determining how much to lend you is very important if you’re looking to take out a loan and want to move quickly when trying to purchase a property.
As a self-employed individual, it is best to complete your tax return early – long before the lodgement date – without lodging your tax return to the ATO. Doing so will enable you to estimate amount lenders are likely to let you borrow. This will work to your advantage as it will help you narrow down your property selection early on. By doing this you will be able to perform due diligence prior to your loan application being approved. With your research done, and once you receive the lender’s approval, you will be able to make an offer on the property you want faster. This will avoid the frustration of being unable to make an offer on a property before other interested parties do so, or finding out the property you want is out of your budget further down the track.
Working With Your Accountant & Mortgage Broker
Whilst you can work out your yearly taxable income on your own, this can be made lot easier by using an accountant. An accountant will be able to work out your taxable income during the financial year based on your assessable income. This can include the income generated from your work, your other businesses and investments including property and dividends from shares. Keep in mind that you may also be eligible for certain tax deductions, which include expenses related to your business, from bills in your home office to the cost of renovating your investment property if you have one. Your accountant will typically be familiar with these deductions and will therefore be able to help you take advantage of them,
Your accountant will also be able to help you manage your taxable income depending on your financial goals. For example, demonstrating a higher income may allow you to borrow more from a lender, but also may result in you paying higher taxes. Alternatively, having a lower taxable income may limit your borrowing capacity, but can help lower the amount of tax you must pay the ATO.
If you are planning to determine your borrowing capacity before the lodgement date, your accountant will certainly be handy in allowing you to work through this faster.
As you can already determine how much lenders are likely to let you borrow based on your estimated tax return, do it before you lodgement date, either on your own or with the help of an accountant. This will help you move faster from the time you take out a home loan to placing an offer on the property you’re after.
Once you have determined your approximate borrowing capacity, speak to the expert brokers at Launch Finance to access the best finance options to suit you and your purchase goals.