Finance – Home loans for the self-employed

A recent experience of my own has prompted this month’s column, and it’s something a lot of Kiwis share. Whether you’re a sole trader or have a small company, the situation can be similar.

With something like 15–20 percent of us being self-employed at any one time, there are a few important things to remember when you go to purchase a home. This doesn’t just apply to your first home either, as you can easily get caught out when refinancing, upgrading or downsizing as well.

What we see all the time is low incomes recorded on the Inland Revenue statements and a customer’s claim that ‘we do earn more than that’. Sound familiar?

The accountant has been tasked with reducing tax and if they do what you’ve asked them to do, then you might just find yourself with business accounts that don’t stack up at mortgage time. The other big problem we see is a simple lack of financials – often made more complex by self-employed people sharing bank accounts with the household.

Here are a few things you can do as a self-employed person to make things easier at mortgage time:
Speak to a mortgage adviser about your planned purchase and find out what income you will need for that application. They can tell you if what you’re thinking is going to be achievable in the current market.

Speak to your accountant about your plans and let them know what your mortgage adviser has said they’ll require for a successful application. It’s a great idea to get these two professionals talking to each other and working on your plans together from this point.

Keep good financials and keep your business transactions very separate to your household transactions.

Pay tax. We can’t use money from ‘cash jobs’ for lending assessments or we commit a crime. The movies make it look as though you can buy anything with a duffle bag of cash but reality is very different.

If you do the above and your business has been doing well then loan applications are not difficult at all.

Of course, there are also those times when we’ve just changed to self-employed and don’t have the two years financial information required by most mainstream lenders. In these cases, the above three points are still important, but your mortgage adviser may have to look at low documentation or alternate documentation loan options for you. It’s not the best position to be in but sometimes they are warranted; I’ve had them myself in the past. Lenders may then be able to assess your loan application on less than two years financials by looking at Inland Revenue Statements, GST returns, or even profit and loss exports from your accounting software. The main drawback is that you will generally pay higher interest rates in these cases and won’t be offered nice things like cashbacks.
It doesn’t have to stay that way though, so work with your mortgage adviser to reassess your loan and get yourself back to mainstream lenders and interest rates once you’ve got the full financials.

The opinions and information expressed above are not a financial recommendation. Contact a financial adviser for written recommendations that are suited to your personal situation.