The problem is quite specific, and one can easily understand it: the owner of a business earning well above the median income is turned down due to their taxable income appearing insufficient to a lending institution’s credit scoring department. Deductible expenses are meant to be deducted under the tax law. It should be mandatory for a lender to consider the ability to repay a loan based on one’s income. These two systems simply clash, regardless of one’s real ability to afford the loan applied for.
Some figures put this problem into context of reality and not fiction. According to ABS data released in August 2025, the total number of Australian actively trading businesses amounted to 2,729,648 as at 30 June 2025. Queensland is the second fastest-growing state by the number of businesses, up 2.7% annually, i.e. 13,579 businesses were added during just one year. A certain share of these businesses will need to take out a home loan, and the way it happens is not as easy as in the case with salary earners.
Why Taxable Income Is Actually the Problem, Not Your Earnings?
The disconnect starts with how they go about calculating taxable income. Business owners can bring down that number through depreciation, the expenses they’ve racked up on their company vehicle, home office claims and the like all of which are totally legit as far as tax is concerned. But lenders look at things a bit differently. They base their serviceability assessments on taxable income, which can look a whole lot lower than the business is actually churning out.
Some lenders use a process they call “add-backs” where they put certain non-cash deductions like depreciation and those one-off expenses that aren’t likely to happen again back onto the figure. Problem is, the way lenders do add-backs varies so much between them: what one institution considers a valid add-back, another might just write off entirely.
- Depreciation is one of the most widely accepted add-backs; amortisation of goodwill is less consistently treated like that though.
- If you’re getting director’s fees from a company structure you’ll need to get verification sorted before going any further and it’ll be treated differently to a straight-up salary.
- If you’ve got an ATO notice of assessment that’s out of date more than 12 months – you’re in for some extra scrutiny.
Full Doc vs Alt Doc: The Trade-Off You’re Probably Missing
Now most people know that full documentation basically means giving the lender two years’ worth of lodged tax returns, ATO notices of assessment, BAS statements, and business financials. And if you can do that you’ll get access to the whole range of lenders and the best rates. Alt Doc on the other hand, which is basically just an accountant’s declaration, BAS statements or business bank statements for a year, suits people who can’t get all their returns sorted but can prove their income some other way. The downside is a more limited choice of lenders and a higher interest rate.
It’s often presented as a clean alternative but Alt Doc is more like a compromise that costs you in the long run. If you’re using it because you just haven’t got your returns in order after two years then you’re in a different boat to people who are just getting going and are expecting a big year ahead. The strategy only really makes sense if the extra interest is less than the hit you’d take by delaying things.
- Specialist and non-bank lenders are pretty much the only ones in the current market that are offering Alt Doc products.
- APRA wants all ADI’s to have a minimum serviceability buffer in place, and that’s applied to the income the lender is willing to accept making the impact of income shading on self employed home loans even worse.
- Even if you’ve got strong Alt Doc evidence to back up your income, you may still find that your effective borrowing capacity is lower than a PAYG borrower on the same income.
The Two-Year Rule Is Warping but Holding Firm
A number of major lenders have shifted their stance in 2025, allowing self-employed borrowers to apply with just a year of trading figures provided they can tick a few boxes. This is a significant shift, but it’s worth remembering that a single year of data paints a very different picture to two years. Lenders who’re willing to consider a one-year application are really looking at how other factors are stacked up: what kind of business they’re in, how their credit file looks, what other debts they’ve got and how secure they think their income is.
Industry type is a big deal. A management consultant or a pro services firm that’s got low overheads and a steady client retainer stream is going to look a lot different to a construction subcontractor or a hospitality operator even if they’re showing the same taxable income. Both may be raking it in, but the lender’s going to have a different view on how secure that income is, based on the industry’s risk levels.
- If you’ve only just started trading, and it’s been less than 12 months since you registered, you’ll probably need to come up with some extra income evidence with newly minted ABNs or be prepared to wait a bit before most lenders will even consider lending to you.
- A clean credit file and minimal unsecured debt are going to become more and more important as the amount of financial documentation you’re providing starts to get thinner.
- One year of seriously high income does not automatically mean you’ll get a free pass. If the previous year showed a significant loss, then your income might still be viewed with a bit of scepticism.
Getting the Application in Order Before You Submit
The biggest mistakes people make when applying for a self-employed home loan happen before you even submit the application. Picking the wrong lender for the job, missing out on key documentation and failing to disclose some of those hidden debts are the three most common causes of avoidable declines. And the good news is that all of those issues are actually identifiable and correctable before it’s too late.
- Get all your tax returns, BAS statements, notices of assessment and business financials in order before you even think about approaching a lender or broker.
- The timing of your application relative to when you lodge your tax return can actually affect the income figure that the lender is going to use to assess your loan.
- If you’ve got any credit cards, HECS debt or personal loans that you haven’t disclosed to the lender, then they’re going to find out about them when they do the credit check. And not disclosing them in the first place is going to create a whole lot of trust issues that are really hard to recover from.
Deposit Size and LMI As Levers to Tweak
Having a bigger deposit upfront can definitely reduce the lender’s risk exposure and can sometimes unlock a lot more flexible assessment criteria for you. For self-employed borrowers with income that’s a bit tricky to pin down, the difference between applying at 80% LVR and 90% LVR can be the difference between a straightforward approval and a bit of a stretch. And lender’s mortgage insurance which protects the lender, not you have a premium that varies depending on the loan size and LVR.
Now, the counterintuitive thing is that paying LMI to get into a lender that’s got a more flexible assessment policy can actually be cheaper in the long run than accepting a higher interest rate from a lender that’s more specialist, but only operates at 80% LVR. It all depends on the rate difference and the size of the loan, but it’s worth doing the maths before you write off a lender just because they charge LMI.
- Going over 80% LVR usually means you’ll trigger LMI, and the premium is calculated on the full loan amount it varies by insurer and lender.
- You can use some of the equity in your existing property to get a lower effective LVR without having to cough up a cash deposit as long as the existing property is assessed as having enough value to secure the loan.
- But doing an equity swap like that requires both properties to be acceptable security to the lender which brings the postcode and property type considerations back into play.
