Being self employed is a great option for many people and can give freedom in a lot of areas of life. It can also mean a few more challenges, and a question we often get asked is "Why is it harder for self employed people to get mortgages?"
Well, the answer is it isn't actually "harder", but there are just a few more things to consider for the best chance of approval depending on your situation
What does the bank look at as income?
As someone who is self employed, the bank uses your “tax paid income” which is essentially your net profit from the business (We know it’s not always that simple).
They don’t use a gross turnover figure because a salaried person does not incur costs of earning income in the same way. Their phone, office etc is all provided.
Using net profit is also a way of stopping the notion that someone may have made $5 million this year by buying product for $4,999,999 and selling it for $5,000,000 whereas in reality their profit was only a dollar. This is commonplace for trade businesses especially.
What about my expenses I get personal use from?
Often we get people saying that a few of their business expenses are covering their personal expenses (Phone, internet, vehicles etc) so these should be included but the banks need to take the official line. By claiming those costs as business expenses the bank (like you have stated to the IRD by doing so) consider that you have incurred those costs as a direct result of doing business and that they are not personal expenses because if they were personal expenses then they would not be tax deductible. That’s why they take your personal income as an amount after business expenses are deducted.
Do the banks use gross income for salaried people though?
Yes, if we are working with people who are in full time salaried or wage earning employment and the banks look at their gross income as all of their expenses of getting that income are covered by their employer and the banks know what tax they are being paid.
What information will I need to provide as a self employed person?
Generally you will have business financials prepared by an accountant for you. The bank will want to see at least 12 months financials from your accountant.
If you are a contractor and you don't get financials prepared, your IRD Tax Summaries will be a really good source of what income you are paying tax on and so these can be downloaded from the IRD website and supplied as evidence of income.
What if I’m newly self employed?
Going "out on your own" is awesome and we love hearing about the amazing things our clients get out and do for themselves. If you're new to being self employed and looking to buy a property, get in touch as early as possible. There are a bunch of ways we can help, even if you don't fit with the main banks policies right now. They range from looking at non bank lenders who are able to help out with newly self employed people to making a plan to get you in to a house as soon as we can prove enough income or using projections from your accountant to support your application of getting a home loan.
We work with self employed clients all the time and so have the experience to support you through the process of getting lending for your next property purchase.
We can be part of your financial team!
Your mortgage broker should be working in with your accountant really early on in the process so that we can just get on with the most recent figures from your accountant and get your lending sorted. We work with accountants all the time to make sure we are supporting you to meet your property needs while they are looking after your best business interests.
We help by telling your self employed "story".
We make a big deal to the banks about you as a self employed business owner and why you are a great client for them. Selling this story is often a key part of the process for us here at My Mortgage. For example, a self-employed builder might be something like…
“Johnny has worked as a builder for 10 years. He was with ABC Construction for 8 years, went overseas and worked in Canada on building sites doing X. He’s now back in New Zealand in the same area with good contacts and is contracting to Best Ever Homes for a minimum of 45 hours / week. Over the past year Johnny has showed a net profit of $XK. We expect this figure to grow year on year by X%.”
Being able to understand your business, your goals and working with your accountant gives us the best chance to sell your story to the banks.
Reach out to Claire, Adam or Greg from the My Mortgage team to discuss your self employed situation and we'd love to work with you and your accountant to get you the lending needed for your next property purchase.