There are many advantages to running your own business: not answering to a boss, flexible working hours, the ability to determine your own destiny and more. Of course, there are also multiple challenges, and one of those becomes evident when you decide you want to buy property and need to qualify for a bank loan.
Many sole traders and small businesses owners make sure they write-off every possible expense during the financial year so their taxable income is as low as possible and the tax they pay is minimal. That’s all well and good — until it comes time to qualify for a loan and the bank uses your business and/or personal income to determine whether to lend to you or not.
Basically, you can’t have it both ways. A lower taxable income means a lower borrowing capacity; a higher income means higher serviceability and more borrowing capacity.
In the post-royal commission environment, where many questionable bank lending practices were forced into the spotlight — especially the under-estimation of borrowers’ living expenses — getting a loan is trickier than ever. And especially a loan for investment purposes.
So what can sole traders or small business owners do to convince banks to give them a loan, especially given banks have tightened up their lending criteria considerably?
Reventon’s finance team deals with dozens of different banks and loan products and writes millions of dollars in loans every month for property purchasers. Here is some of the advice we give to our self-employed clients in order to ensure their loan applications have the very best chance of success.
If a property purchase is your goal, and you’ve managed to save the required deposit amount, you need to plan at least one but preferably two years ahead. You should ensure your taxable income is maximized, ideally for two years, so that you pass the strict loan serviceability criteria that banks adhere to. There is absolutely no point saying to the bank manager: ‘But I really earn $150,000 a year, it’s just that my clever accountant manages to get my taxable income down to $40,000’. That’s not going to cut it, as the bank will only use your legal tax assessment notices as proof of your income.
Go to an SME finance specialist
Not all mortgage brokers are created equal. You should ask fellow business owners for recommendations and get a referral for a broker who does a healthy amount of loans for self-employed people and SMEs, as they will be more experienced in guiding you on exactly what you need to do.
A finance specialist will also be able to explain what Lo-Doc Loan options might be available to you if you don’t qualify for a standard bank loan due to your taxable income level, don’t have up-to-date financials or have not had an ABN for at least two years.
Research the right bank for you
Some banks have more of an appetite to lend to this type of borrower than others. It is very important to apply to the most suitable lender for you after you have done your bank research. You definitely don’t want to be applying to multiple banks to get a loan approved, as this will create ‘hits’ on your credit record and could be seen as a red flag, thus reducing your chances of getting any loan approval.
Get financially fit
Before you apply for loan, make sure you have been a ‘model bank citizen’. What this means is you don’t have multiple credit cards in your name, as the full limit of each card will be used (regardless of how much is currently owning) in assessing your debt liability calculations by the bank assessor. Also be sure to make your monthly payments ahead of time or at least by the due date for all utility bills, rent, credit cards and other regular payments. This also applies to unpaid parking or other fines — they can all impact on your creditworthiness, and you don’t want to lose any of your credit ‘points’ when being assessed for your loan.
Have a buffer
Every borrower should a buffer in place, allowing for rate rises or other unexpected costs. This is especially important if your business income is subject to seasonal or other fluctuations, and this is your first property purchase. At Reventon we always build in a buffer of at least a 2% increase in current variable interest rates for clients we work with, to ensure they will comfortably be able to service their repayments should rates rise.
The bottom line is, don’t be discouraged if you are really motivated and determined to buy your first home or investment property. There will usually be a way to make it happen and being aware of and actioning these five tips will help make homeownership a reality for you.