Lenders usually assess self-employed income from your lodged tax returns and financial statements rather than your turnover or your latest good month. Some alternative-documentation loans use other evidence, such as BAS, bank statements or an accountant's declaration. That means the work you do on your paperwork before you apply can shape your loan amount.
This article is for sole traders, contractors and business owners who plan to apply for a home loan soon. It covers what lenders look at, how deductions can affect the result, and when to start the process.
How Do Lenders Assess Self-Employed Income for a Home Loan?
Lenders usually assess self-employed income using your tax returns and financial statements, and many prefer to see one to two years of history. Because you have no regular payslips, they look for evidence that your income is steady and likely to continue.
Many lenders prefer one to two years of personal and, where relevant, business tax returns, along with the matching notices of assessment. Policies differ between lenders. One may average two years of income, while another may focus on the most recent year. This is why your choice of lender can change your borrowing capacity even when your finances stay the same.
If you want a rough idea of where you stand, our borrowing capacity page is a useful first step.
Which Documents Show Your Income When You Are Self-Employed?
The documents depend on how your business is set up. Sole traders typically supply personal tax returns and matching notices of assessment, while company and trust structures add business returns, financial statements and, for trusts, the trust deed.
Lenders generally want returns that are lodged and assessed. Most require lodged and assessed tax returns, supported by an official Notice of Assessment from the ATO. A draft return is unlikely to be enough. Some lenders also ask for business activity statements and business bank statements.
If you have an unlodged return, an overdue BAS or an ATO payment plan, deal with it first. Lenders may check whether you have outstanding tax debt, and it can slow down or weaken a home loan application.
Why Tax Deductions Can Lower Your Borrowing Capacity
Claiming more deductions lowers your taxable profit, and a lender usually works from that lower figure. A strategy that reduces your tax bill can therefore reduce the amount you can borrow.
As an example, consider a sole trader who buys a work vehicle and prepaid some expenses in the same year. Their accountant claims the deductions, and taxable profit falls well below the year before. Six months later they want an owner occupied home loan, but the lender sees the lower profit and offers a smaller loan amount than they hoped for.
Their broker reviews the two returns and asks the accountant for a letter explaining the one-off items. They also compare lenders that assess income in different ways. The broker finds a lender whose policy suits the business's pattern of income, and the buyer proceeds with a loan amount closer to their target. The trade-off was time: the broker needed several weeks to gather the paperwork and explain the figures.
A lender may not accept every explanation, so there is no certainty about the outcome. Speak to your accountant before changing how you manage deductions. They can advise on your tax position, and a tax outcome is never guaranteed.
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Can You Get a Home Loan With Less Than Two Years of Trading?
It is sometimes possible, but you will usually have fewer lenders to choose from. Some lenders will consider a single year of tax returns, particularly where the loan-to-value ratio is conservative and the deposit is larger.
In practice, a bigger deposit means a lower loan to value ratio (LVR). A lower LVR can also reduce or remove the need for Lenders Mortgage Insurance (LMI), which is an extra cost added when the deposit is smaller. Some borrowers use an alternative-documentation loan, which lets eligible self-employed people verify income without two years of tax returns and financial statements. Terms on these loans vary between lenders, so check the cost and conditions carefully before you commit.
If you moved from employment into your own business in the same field, mention it. Your work history can be part of the picture a lender sees. First time buyers in this position can also read our first home buyers page.
Start Your Home Loan Pre-Approval Before You Need It
Starting early gives you time to fix paperwork issues, and home loan pre-approval lets you see your likely borrowing range before you make an offer. Pre-approval is not final approval, because the lender will still check the property and your circumstances at the formal stage.
Self-employed applications can take longer to put together because there is more paperwork, so it helps to start well before you want to buy. A sensible approach is to ask your accountant whether your latest return has been lodged and assessed. Then talk to a broker about how different lenders would read your figures, and about the home loan options that suit your plans.
When you apply for a home loan, features matter as well as income. An offset account can reduce the interest you pay on the balance held in it, but loans with offsets can carry higher fees or rates. Check with your accountant before holding business funds in a personal offset account. If you already have a loan and your income has grown, a loan health check or refinancing review can show whether your current lender is still the right fit. You can also see our full range of home loans.
Call one of our team or book an appointment at a time that works for you, and we will look at your income, your documents and your lender options together.
Frequently Asked Questions
What do lenders use to assess self-employed income?
Lenders mainly use your lodged tax returns, notices of assessment and financial statements. Many prefer one to two years of history, though policies differ between lenders.
Can tax deductions reduce how much I can borrow?
Yes, because lenders usually work from your taxable profit, and higher deductions lower that figure. Speak to your accountant about your tax position before you change your approach.
Can I get a home loan with less than two years of self-employment?
Sometimes. Some lenders consider one year of returns, especially with a larger deposit, and alternative-documentation loans exist, but you will usually have fewer options and should check the terms carefully.
When should I get pre-approval if I am self-employed?
Ideally well before you start making offers. Self-employed applications can take longer to prepare, and pre-approval shows your likely borrowing range, although it is not final approval.
