I have deposit, but can't prove to the bank

Hi all,

we're looking at buying a house in the range of $2m to $2.5m. I have a $500k deposit (so 20%), but because I am self employed, and my accountant is very good, on paper my wife and I don't have the necessary income to support the loan.

i've asked my accountant to ensure this year's financials show us earning more, and i'll be moving more money out of my company into our personal accounts, but this will therefore have us paying a large tax bill.

even the bank manager I spoke to agreed, saying (and i'm paraphrasing) -
yes, it makes good accounting sense to only pay yourselves the minimum you need, but I'm afraid the bank won't lend to you based on these financials. it goes to head office in Melbourne and all they look at is the numbers and on those tax records, you can't make the payments. sorry.

what can I do? I don't want to be paying my wife and I extra for the next 18 months, just to make our personal tax returns look better. this will cost us both the 18 months and thousands in paye tax.

any advice? i've gone to a few mortgage brokers, and they say the same thing. i need someone who thinks differently.

thanks.

 

Is this a troll post?
Oh how us lemmings would have loved to build our portfolio without having to pay the ridiculous amounts of tax we do

 

You've spoken about not being able to prove income, but the title suggests that you can't prove the deposit?

You're not going to get a different answer from any mortgage broker or lender (at least not a legitimate one). How much you can afford borrow is directly tied to your income. If you can't prove how much you earn, the banks aren't legally allowed to lend you money.

A low doc loan may be able to help. With this you self declare your income and it's supported by a combination of trading account statements, accountant declarations and BAS statements. These loans tend to cost more though.

The bottom line is if you want to borrow money cheaply, you need to prove your income which is generally done via your tax returns. If you want to borrow more, you need to pay your fair share of tax.

 

no it's not a troll post. any successful small business owner (ie a doctor, IT professional etc ...) only pays themselves the minimum to survive and puts everything else through the business.

 

This is simply because you are not earning enough. Accountants cannot make income disappear, only allow you to claim the allowable deductions - which mean you are not earning enough

 

You might be confusing a business with a company? If the company is running a business and you are receiving a wage, and you own that company, most lenders will take into account the company income as well.

 

I get where you're coming from, I'm self employed myself. My sister is a doctor and I also come from an IT background. I've seen the kind of financials you're describing many times.

Realistically if you're doing this, you're putting a lot of personal expenses through the business. You're kind of cheating the tax system. Easy enough to get away with, but one consequence is it makes borrowing money difficult and expensive.

I'd also argue that many small business owners would be more successful if they paid themselves a salary (along with the appropriate taxes). My observation is that the businesses that can achieve this and maintain consistent cash flow tend to be more successful in the long run.

 

Thanks Peter. I think that's all I can do, and then wait until at least next financial year.

Like you can probably guess, I am a consultant too. And yeah, I know it looks like "cheating" to put 50/50 things through the business, but let's face it, with all the different taxes, and expenses (not to mention stress) of running a business, plus not to mention lack of holiday pay etc ... tax minimisation is one of the few rewards.

It's just frustrating, knowing I have saved the 50%, and that I can make the repayments but the banks won't look at the whole picture.

Thanks for the advice guys. I guess we just have to wait it out.

 

If you are self employed you can simply stop claiming deductions, but this is artificially inflating your income.
Income is earnings less allowable deductions.

 

Not if they want funding they don't

 

Hi Rod. 500K at hand - could you build a house? 500k to kick it off, Pay the rest as you go/build? Good luck.

 

I really do understand where you're coming from. Small business has more risks, more stress than anyone.

You could investigate the lo-doc option for lending. You're not going to find this through mainstream lenders these days, but it is an option that can work well in certain circumstances.

 

nice idea, and the kind of left-field thinking i was looking for. but sadly no, i know where we want to live (close to kids school etc) and no vacant lots.

 

related party loans? $1mil might be a big ask, but there may be family who could borrow and then onlend to you. later on refinance this with a bank when servicing happens. I have done this with clients - one's father in law borrowed just for this reason.

 

It depands on how you strcutre your company. Did you park all your extra funds in a shell company also owned by your trading company?

I've had success previously getting a $1m owner occupied loan for a self employed that only declare 80k a yr in salary but also have another shell company that recieve most of the biz income as dividend.

 

That would be an extremely unusual structure as the 'shell' company would be exposed to creditors of the trading company.

a more common way to structure would be for a holding company to own the trading company and dividends paid out to the holding company so there is no retained earnings.

Or shares of the trading company owned by a trustee of a discretionary trust which receives a dividend and pays it to a bucket company owned by another trust.

 

I can't remember the full details as it's been a while, but from memory the company actually distribute income as dividend to the family trust and the husband and wife (my customer) are the trustees and there are three beneficiary which consist of husband and wife and the shell company to store excess cash and only pay 30% tax.

They did this structure part of the reason was becuase this is a family biz that involve many family members.

 

I think that sounds like the second scenario I wrote about above - the trading company is owned by the trustee of a discretionary trust which it pays a dividend to and the trustee pays some of that dividend to another non-trading company - commonly called a bucket company.

 

Yes I have had excited clients saying they making millions. then i get the tax returns and .... The turnover might be millions but the taxable income is barely $100k - wages and profit.