Self-employed borrowers beware

By Karen Baldwin
August 11, 2009

Self-employed investors about to do their latest tax return should keep in mind unintended impacts that may limit their ability to access finance and lending over the year ahead.

Independent business owners, contractors, freelancers and consultants in the market to buy a home or investment property need to be mindful of the tax deductions they are making or intend to make.

Often self-employed people have accountants who do a great job in legally minimising their client’s taxable income – exactly what they’re supposed to do.

However, the issue for business owners is that when it comes time to demonstrate their ability to service a loan, they cannot produce the evidence because their tax returns show low net earnings – usually year on year.

With the withdrawal of no-doc loans and tightening criteria for low-doc loans, this can mean reduced access to funds for investors and the self-employed.

Additionally, lenders will only allow certain deductions to be added back into your earnings – things like depreciation, director’s salary, one-off capital expenses and extra superannuation payments.

From a lender’s perspective – based on what’s on paper – this shows a reduced capacity to repay the debt and can severely limit how much can be borrowed for either an owner-occupier or investment property.

Self-employed people who are considering borrowing to invest in property should plan ahead and weigh up what is best for them financially.

In the current environment there is now much closer scrutiny of a borrower’s ability to service the loan – and consistent business earnings are now more important than ever.

Please note that information in this publication is subject to change without notice. Smartline assumes no responsibility for any errors, omissions or mistakes in this document. © 2008 Smartline Home Loans P/L. ABN 38 085 370 270