SELF-EMPLOYED?

AND LOOKING TO BUY OR REFINANCE?

*FACT SHEET Self-employed? Thinking about buying a house? Refinancing? Obtaining a home loan, or refinancing your existing, isn’t always easy for self-employed applicants. That’s because most lenders and brokers aren’t familiar with your situation. They’re not used to dealing with tricky applications and they don’t know how to get your loan approved. When you’re looking for reliable finance approval, then it’s best to deal with a specialist mortgage broker you can trust – someone who understands the unique needs of the self-employed. As a result, I have put together this fact sheet, so that you can be armed with as much information as possible, and ask your bank or broker the right questions so that you know that they are qualified to put together and present your application, so that you get approved.

* Why? In my work as a mortgage broker I have come across several self-employed people who have struggled to get loan approval prior to seeing me. And it’s just not fair. Self-employed people often work harder than their PAYG counterparts, they contribute to the economy, and they provide work opportunities for others. Not only that, regular banks (yes, even the in-house loan writers!) and mortgage brokers just aren’t interested. It’s too complex – they don’t understand your needs. They put you in the ‘too hard basket’.

* Where do most loan writers and mortgage brokers and lenders trip up? Lack of knowledge and understanding Many brokers and banks don’t understand the flow of money in your business when there are complex structures with multiple companies and trusts in place. Double dipping This is where the broker takes an income or expense into account twice. Again, this due to a lack of knowledge and understanding of the flow of money in your business. Procrastination When a loan is difficult it often gets put in the back of the line for a more ‘convenient’ time. Insider knowledge Sometimes your approval will come down to knowing which lenders have a ‘willingness to approve’ and work with you as opposed to an ‘attitude of declining’ when it gets too hard. Presentation All brokers make use of notes when presenting your application for assessment. Many brokers don’t know how to present your application in the best possible light and use an assertive tone. In addition, if your application is packaged neatly and succinctly with all question marks addressed upfront, it will get approved a lot quicker.

* How do banks assess your income? Most lenders believe that by looking at your past tax returns they can predict how stable your business will be in the future.

Banks and non-bank lenders alike tend to be very wary if you have an income that has increased or decreased by a large amount in the last two years.

One lender may use the lowest of the income figures for the last two years.

Another may use the most recent year’s income as shown on your tax return.

Some may even average the two years income.

Add backs and depreciation can be included, some lender use 50%, some 80% and some 100%.

As you can imagine all these specifics make a big difference to your loan application! Importantly, every lender will interpret your tax returns in a different way and may look at your skills as an entrepreneur, your experience in the industry and the risk profile of your industry to determine how to assess your income.

Depending on your situation, I may pick and choose which information to provide to help prove the highest possible income.

I specialise in finding the lender that will look at your application most favourably!

* Assessment scenarios Often, one of the following two ways will be used to assess self-employed income: Option 1: BUSINESS IS SHOWING $0 OR GREATER NET PROFIT AMOUNT No business add backs is used, only the taxable income as per the applicant’s individual return.

Business debt and expenses aren’t considered. This option is by far the simplest, and often the case with sole traders and small businesses. However, as your company grows and you employ more people, increase your gross receipts and acquire more equipment, more than likely, the option below will be your scenario. Option 2: BUSINESS IS SHOWING A LOSS AND ADD BACKS ARE REQUIRED FOR SERVICING Income from the individual tax return is used and all relevant add backs are used to demonstrate your borrowing capacity.

If the company has recorded a loss, this needs to be deducted from directors / borrowers personal income (If the loss is greater than $10,000, this may not be accepted by the assessor without a satisfactory reason for the loss).

Any profit will be added to the applicant’s salary amount and taxable income.

If voluntary superannuation is paid by the company larger than the government super guarantee rate (currently 9.5%) then this can also be added to the taxable income for the applicant.

Business financial debts must be expensed including hire purchases, overdrafts or margin lending at sensitised rates.

Interest expense, hire purchase charges, lease fees or depreciation can all be added together and be divided by 12 for a monthly net (untaxed) add back amount.

* Full doc or lo-doc? Whenever possible, opt for a full doc loan. Full doc stands for full documentation and means that all your business financials are up to date and that you can provide at least two years full financials. When this is not possible a lo-doc loan may be your only option. Disadvantages:

Higher interest rate

Higher fees

Larger deposit required

Lender’s mortgage insurance is often payable when you borrow over 60% of the

property’s value

Max LVR (loan to value) is generally 80%.

When would you go for a lo-doc (sometimes referred to as alt doc) loan?

Your financials are not up to date or you don’t have access to them

Fluctuating business income

Your financials are not reflecting the full story

* Documents that you need to provide Banks vary in what they will ask from you in terms of paperwork. It also depends on if you are purchasing or refinancing, and the LVR or ‘loan to value ratio’ (loan balance as opposed to house value). In addition to general documentation such a copy of your driver’s license and bank statements, they will also require: FOR SOLE TRADERS: 1. 2 years individual tax returns 2. Corresponding notices of assessment FOR PTY LTD’s: 3. 2 years company tax returns 4. 2 years individual tax returns 5. Corresponding notices of assessment 6. If you have trusts or partnerships, 2 years tax returns for each 7. Profit and loss statements 8. Balance sheets In some cases, the assessor may also want to see your BAS statements or ask for a letter from your accountant. Give your mortgage broker or bank direct access to your accountant, that way they can communicate with each other without interrupting you every 5 minutes.

* 12 Tips and things to think about

Know the bank policies. Easier said than done, but one of the biggest mistakes is to think that all banks are the same. All banks have different policies, not just with self-employed applicants, but in almost every aspect of lending. Your application will be assessed differently at ANZ to CBA, and there are some banks that simply don’t handle self-employed applications very well at all.

Understand how you will be assessed. Ask how the bank will assess your application. Will they use the lowest of the income figures for the last two years or will they use the most recent year’s income as shown on your tax return or will they average the two years income? This is critical information, especially if you are looking to borrow to your max capacity.

Research your best options. Don’t just go to the same bank that you have your business account with. Banks often rely on this convenience factor and therefore they don’t have to try and win your business –so they won’t offer you the best deal.

Know your business add-back that will increase your borrowing capacity.

1. Interest expenses 2. Depreciation 3. Car allowance 4. Excess superannuation contributions 5. Non-recurring expenses 6. Non-cash expenses

Look good. If you know that you are going for a loan, make yourself as attractive to the banks as possible, and reduce credit card and store card debt wherever possible. Needless to say, your aim is to go for ‘low expenses – high income’.

Protect your credit rating. This is crucial. If you go for a business loan, or enquire about a business loan at some point, make sure you don’t enquire as a private person but as a business, this way the business accrues the credit enquiry and not you. Too many credit enquires make banks suspicious and they will think one of two things, or both: 1. You have been declined, so they will look at your application with even more scrutiny and possibly fault find. If too many credit enquiries are found your application may not even get to the assessor; it can be instantly declined upon submission. 2. Your business is struggling with cash flow.

Consider a home loan product with an attached offset account. The offset account is a perfect place to store your GST payments before you remit them to the ATO. You will save a lot on interest paid to the bank and pay your principal loan amount down quicker.

Consider your tax. When you are self-employed, it is only natural that you want to reduce the amount of tax payable. However, if you reduce your taxable income too much, you also reduce your borrowing capacity. If you are looking at buying or refinancing within shortly, make sure you get the balance right.

Get your loan structure right. This is especially important for investors due to the fact that some interest is tax deductible. If you have the wrong structure, you will make your accountant’s work a nightmare, and he will charge you a pretty penny for the extra hours that you put him to work.

Mind your transaction statements. Do you have a habit of letting your business account or everyday banking account go into negative? Even a minor blunder of a few dollars, if it happens regularly, will be looked upon unfavourable. Some banks hate it so much they can decline on this basis alone. This is another reason why it can be useful to look beyond your existing bank.

Stay on top of your GST, BAS and superannuation expenses. Banks are very wary when there is ATO debt present. If you have fallen behind, make an official payment plan and provide the statement to your broker. If the ATO debt is hefty, and you already have a home with equity, you may want to consider to refinance and debt consolidate, as ATO debt has a high interest rate.

Be honest with your broker. If using a broker, be as honest and upfront as possible. Remember they work for you, not the bank, and the more information they have, the better they can serve you.

* What to communicate with your broker To get the best out of your mortgage broker, communication is key.

Make sure you ask a lot of questions and tell your broker exactly what you are looking to

achieve. Sometimes we feel embarrassed or vulnerable when disclosing our full financial

situation, but a mortgage broker has most likely seen it all, so don’t! It’s imperative that

you are open and honest, that way, your mortgage broker can help you better.

Why is this?

Mortgage brokers won’t look into your credit file unless they find a compelling reason to

do so, and they will only do this after obtaining your permission. If there is something on

your credit file that you haven’t disclosed, they will most likely find out by the assessor

once your loan is submitted, at which point, it can be too late to take corrective action.

If you are completely honest with your broker from the start, he or she can foresee

potential obstacles, address them upfront, or steer you away from lenders that are

sensitive to that particular issue increasing your chances of approval.

What exactly goes on your credit file?

1. Any credit cards that you may have applied for, whether or not you actually

proceeded with them, more than likely, a credit enquiry would have been lodged on

your file.

2. Store cards

3. Furniture bought on credit

4. Car loans

5. Ever made a very general enquiry to a building company? Well guess what? You

probably have an enquiry that looks like a decline to any bank that picks your file up.

6. Enquiries made to debt consolidation companies

7. Will a mortgage broker put a credit enquiry onto my file? Never! A credit enquiry is

lodged on your file by the bank once you go for a loan.

* Questions to ask your mortgage broker

What experience do you have as a mortgage broker?

What is your experience dealing with self-employed applicants?

Did you have a good mentor when starting out in the business? A broker with two

years’ experience can be better than someone who has been in the game for 10

years if they had a good mentor.

What is your process exactly?

How often will you update me on the progress of my loan? I hate not being kept in

the loop!

Are you a member of MFAA or FBAA?

Are you a premium broker with any lender? If so, can you negotiate a better deal for

me?

Are there any particular lenders that you like to deal with, and why?

What loan features do you think will suit me as a self-employed applicant?

On a scale to 1-10 what are my chances of being approved? It’s important that your

broker is honest, and not just say what you want to hear to win the business.

Do you have any references from existing clients? If a broker is any good the word

gets out!

* My Mission My mission is to assist individuals source the best home or investment loan, tailored to their specific financial situation, lifestyle and needs. Element Finance has a modern and streamlined approach designed for the time poor, FIFO’s and other professionals who simply do not have the time to run around. I want to help you maximise your cash flow, and put your hard-earned money back in your pockets.

* My Values My clients are like family I have my clients’ best interest through sincere and honourable intentions. Amaze everyone I seek to amaze in everything that I do. Pride I have confidence in my ability to succeed and quality in the service I provide. Stay humble, hustle hard Characterised by performance and commitment to services.

* What my clients have to say: + Pamela has been excellent! Prompt polite and goes the extra mile. Can't thank Element enough. Will use them again for the next investment for sure. Many thanks – Barry Scholtz + Pamela, was fantastic when it came to switching banks for our home loan, because we are self-employed it was a bit more time consuming, but Pamela was amazing and went above and beyond my expectations. Thank you so much Pamela – Tanya Dodd + We used Pamela at Element Finance for the purchase of our first home in Australia. She was nothing short of excellent. Of course we knew nothing of the process or terms involved in buying a house but Pamela always treated us with respect and always explained everything clearly. Nice to know the ‘small fish’ are treated the same as the big ones! Thank you Pamela for guiding us, we are ever so appreciative. – Miki Mulqueen + A big thank you for Pamela sorting my finance stuff, she has been awesome. – Ian Reader + Pam you are the best! - Ram and Sabita Shrestha + I have known Pam for some time now and she is very professional and dedicated to her job as a Mortgage Broker. When we got our permanent residency Pam was instrumental in arranging my mortgage for my new property here in Australia. The whole process was streamline and went with no problems. I would highly recommend anyone looking for a mortgage to reach out to Pam and her Team at Element Finance. Thanks again Pam – Roy Webb + Brilliant work, as usual, Pamela! You are our Financial Goddess! – Terezina Brooks + Pamela went above and beyond, she is professional, helpful, and friendly, we have been nothing but impressed… Thank you so much Pamela. – Tanya Dodd + I have known Pamela Palmqvist for a period of 4 years & from my view she seems to work in a most diligent manner to secure the most appropriate business for her particular clients’ needs. But most importantly her follow up during the process from initial contact to settlement is excellent and extremely professional. – Mark Brophy + I sell real estate for a living and I emphatically recommend the services of Pamela Palmqvist. She has detailed knowledge of complex lending criteria and her ability to find a suitable lender for her clients within efficient times are incredible. I recently used Pamela to organise finance for a client who had been told no by their bank, and was very pleased that Pamela could seek out an alternative solution. Keep up the amazing work! - Andrew Stone

+ Fantastic service and we wouldn’t have done it this quick without using Pamela. - Dorien Copejans + I found Element Finance Mortgage Broker (Pamela) delivered beyond my expectations. Very happy client! Keep up the good work! - Myra Oudendijk

Self-employed? Thinking about buying a house? Refinancing? Get in touch today! Pamela Palmqvist, Mortgage Broker for Element Finance p: 0413 820 709 e: pamela@elementfinance.com.au