4 steps to get a mortgage if you’re self-employed

Want to get a mortgage as someone who’s self-employed? This is the guide for you.

As a mortgage adviser, I know there are a few myths about self-employed people and mortgages. Most self-employed people think:

• I need to have 2 years’ worth of accounts before I can get a mortgage
• It’s harder for me to get a mortgage.

In this article, you’ll learn the 4 practical steps you can take to get your mortgage approved.

This applies to you if you own a small business, are a freelancer, a contractor or if you own a side hustle.

Quick facts:

• Business owners don’t always have to wait 2 years before getting a mortgage
• Use Xero or MYOB to manage your accounts
• Make sure you pay tax in NZ
• Don’t put all your expenses through the business

Practical step #1 – Use good accounting software

If you’re self-employed, you need to use accounting software. Before you get approved for a mortgage, the bank wants to see your track record in business.

This could be Xero, MYOB or Henry. These types of apps will keep track of your business and can generate the reports you need.

For instance, banks need to see a profit-and-loss statement from self-employed people.

This shows all your earnings and costs over the last year or quarter.

If you’re using Xero, you can get this quickly and often free.

If you don’t use any software, your accountant will need to crunch numbers the old-fashioned way. That means rummaging through files and spreadsheets.

This may also cost you around $1,000 for that report. It can also waste weeks or months.

I recently had this with Steve. I was helping him get a mortgage.

He told me his business was doing well and making more money than it had in the last financial year.

So, I asked him to give me his financial statements for the current financial year, but Steve wasn’t using accounting software.

So he had to go to his accountant. It took 2 months before his accountant sent through the reports – and it cost Steve quite a bit of money.

Practical step #2 – Think twice before putting all your expenses through the business

Now, we all like to minimise tax. But here is where self-employed investors shoot themselves in the foot.

You might be running certain expenses through your business. It could include your car, travel expenses, a home office, a portion of your rates and a whole heap else.

These are costs you would have to pay anyway. But, if you include them as a business expense, it helps reduce your tax.

So, if your accountant is doing their job, they will be claiming all these expenses.

And for a business owner, that’s usually a good thing.

But this can stop you from getting a mortgage. Banks lend to you based on your taxable income.

Revenue is how much money comes into the business. Taxable income is what is left over after all expenses are paid.

So, I’ve seen instances where a self-employed person’s revenue goes up, but their taxable income goes down.

So, if your accountant is overly zealous with the tax deductions, you may need to claim fewer expenses.

You’ll pay more tax, but you’re more likely to get your mortgage approved.

Practical step #3 – Make sure you’re paying tax in New Zealand

There’s a myth that says banks won’t lend to you if you’re self-employed.

That’s not true. The lending rules are the same whether you’re self-employed or work a regular job.

But it is important to say this is only true if you are paying taxes in New Zealand.

So, if you are paying tax offshore ... a bank won’t look at you.

But banks will always look at Kiwi taxpayers.

For instance, Dave is a self-employed tradesman in New Zealand ... but he is contracting with an Australian company.

So, a big factor in his mortgage application was whether he was paying tax in New Zealand.

In Dave’s case, it depended on his bank.

Some banks are more willing to lend to this type of borrower; others will make it harder for you.

For example, some banks will require you to have a 30% deposit if your income is from overseas.

This can cut people out of buying their first home or first investment.

Practical step #4 – Get good advice from a good accountant

Many self-employed people are first-timers when they approach a bank for a mortgage.

And a lot of people feel like they need to wait 2 years before even thinking about it.

This isn’t always the case. It can depend on your industry, too.

I once had a client called Susan. She was a contractor who was paid $8k every month by a business ... that’s pretty straightforward.

She had a contract. We knew week-to-week what she was going to earn.

But it’s more difficult for Barry, who has just started a cafe. His income is more variable.

There’s no way to prove how profitable Barry’s cafe will be. It takes most businesses a few years to get up and running to see what you can make.

Every business is different, so don’t make assumptions and write yourself off.

I say, if you want to invest ... don’t wait around 2 years. Go for it now.

Talk to someone who does it every day and who can give you an idea. And if you’re looking for a mortgage adviser, you might like to see me or one of my team at Opes Mortgages.