Here’s how to calculate your provable income as a self-employed person
If you want to estimate the income a bank is likely to use, here’s how to do it.
Step #1: Gather your financials
Start with your last one to two years of financials.
If you use accounting software like Xero, MYOB or Hnry, this is usually straightforward.
These platforms track your income and expenses and can quickly generate profit-and-loss reports.
If you don’t use accounting software your accountant will need to prepare this manually.
That can take time and often costs, which is why having clean systems in place matters more than people realise.
Step #2: Identify your taxable profit
This is the most important step.The thing is most self-employed people try to minimise tax, and that can be sensible.
You might be claiming expenses like your car, travel, home office costs, or even a portion of your rates through the business. These are legitimate deductions and your accountant is usually right to claim them.
But this can stop you from getting a mortgage if you are claiming a lot of deductions that you would normally pay anyway if you were a salaried employee.
If you claim lots and lots of deductions you might pay less tax but your taxable profit will also be lower. That means you might struggle to get a mortgage.
That’s why it’s possible for your business to make lots of sales, earn more revenue, and still have less borrowing power than you expect.
In some cases people deliberately claim fewer deductions for a period of time. That way their taxable profit is higher and reflects their true earning ability.
It’s a balancing act that you’ll want to discuss with your mortgage adviser and accountant well before you apply for a mortgage.
Step #3: Ignore drawings and irregular payments
This is where many self-employed people get caught out. Business people can take drawings from the business (this is where the business lends you money).
Because the business is lending you money, you don’t pay tax. Since you don’t pay tax it’s not considered income in the bank’s eyes.
For example, let’s say your business might earn $100,000 per year. But instead of paying yourself a salary or dividend, you simply take money out as drawings.
From your point of view, you feel well paid … after all, you’re spending the money.
But from the bank’s point of view, those drawings aren’t income. They’re treated as money owed back to the business. In some cases your personal income may effectively be treated as $0.
So, the bank will ignore the drawings and go straight back to the taxable profit.
Step #4: Factor in any losses
Losses matter … a lot. Let’s say:
- your business earns $50,000 per year (after costs), so
- you then pay yourself $100,000 using some cash saved from earlier years, that means
- the business is now losing $50,000 per year.
So yes, even though you’re receiving a six-figure income personally (and have money in the bank) the bank won’t treat your income as $100,000.
That’s because the business is relying on money earned previously.
So they will take the loss of the business and deduct it from your usable income. In the above case, your provable income would be $50,000 (the company’s taxable profit).
Cash reserves help with deposits and buffers, but they don’t turn losses into income.
Step #5: Sense-check it with a mortgage adviser
Different banks treat self-employed income slightly differently.
A mortgage adviser can sanity-check your numbers and confirm how a bank is likely to look at them.
Sure, this won’t give you an exact amount, but it will give you a realistic income to work from.
