Self employed? Loan? Confused!

Hi all

Thanks for the great resource that is this site, appreciate it.

Working on a property purchase for the first home of my partner and I.

I have been a director+shareholder of a business (a private company) for 13 years, and I am also employed by the company (also for 13 years). My PAYG employment is my primary income, and it is ongoing and consistent.

My primary relationship with the company (which also employs others, and has other directors and shareholders) is as an employee.

My income is approximately 45k gross per annum, and my partner's is approximately 30k net per annum (note gross and net, respectively).

We have no debt, no other loans, no car repayments, etc. We have one 10k credit card which we're willing to get rid of if necessary.

We have a 200k deposit ready to go, and only want to buy property in the 400-500k range, so feel pretty good about getting a relatively small loan.

The company that I am a director+shareholder of (but most of all an employee) makes 100-300k per year, and has a 20-100k loss about half its years, and a 20k-100k profit about half its year. It's got no debt, no loans, and no bad credit marks, and has been stable and rented the same office space for ~8 years. It's 13 years old.

I am confused how lenders will treat this? Our broker seems keen on using the company tax returns as part of it, and seems to think that lenders (e.g. CBA, UniBank, others.) will treat my income as the company, and might ignore my PAYG income (despite it being my salary for more than a decade).

I have never had a year in my adult working life where I wouldn't have been able to service more than double a ~$2000 theoretical monthly repayment.

Can anyone help me shed some light on this rather unfocused question?

And, more specifically, what could we be doing to optimise our ability to borrow etc.?

Thanks!

 

You're self employed given that you're both a director and shareholder. That your business pays you a salary doesn't change this.

Look at it this way. Who hires and fires you? Who determines what your salary is? If it's you, you're self employed. If it's someone else at arm's length, you're an employee.

Lenders will usually want both your business and personal tax returns alongside the business financials. Both personal and business circumstances can be taken into account. All of it contributes to your serviceability.

Your payslips and PAYG summary are irrelevant in this scenario.


One thing does confuse me a little, you indicate that the business is profitable for half the year and makes a loss for half the year. If this is the case and it's part of your business cycle, it's not really relevant. Lenders measure the profitability of the business from one financial year to the next. As long as they can verify that the business is consistently profitable over 2 or more years, they don't really care if there are periods within that year where the business runs at a loss.

 

Thanks for this.

sorry to clarify the business is profitable one year and makes a less another year, going back and forth (roughly, obviously).

any thoughts on loan chances?

 

This makes it tricky. Lenders tend to use the income from the average of the last 2 years, or the lower year if there's a 20% or more difference.

A few lenders will simply use the last financial year. Being July, this gives you a choice of using the 2018-2019 year, or you could get this years tax done right now and use that!

Alternately if there's a reasonable explanation, you might be able to work around it. A deeper understanding of the business is really required here.

In many cases, you could also simply try to qualify for the loan based on your personal returns, with an accountants letter simply stating that the business is trading profitably. Your broker has likely already considered this as it's usually the easiest place to start.

 

Thanks. Very helpful.

What are lenders looking for?

I am not the only director of the company, how does that factor in?

The company has ~$200,000+ of its own retained profit in the bank, how does that impact things?

As per many small businesses, in the interest of being tax efficient, it makes a loss many/most years. How does that impact the loan ability of me?

I've heard of a thing called an add-back, but can't find a reliable list of what might be added back?

Thanks so much!

 

Thanks. It's just so confusing. I've never had a year in 13+ years in business where the loan wouldn't be serviceable.

The company has no debt, no depreciations claim. It's very simple really.

FY2020 the company had ~100k tax loss on ~$200k revenue, FY2019 the company had ~50k tax loss on ~$250k revenue.

I am one of two shareholders/directors. There are only two.

The company has ~$250k retained earnings in the bank, and clear. We have no debts, no loans.

I personally have made 45k gross each year, documented via PAYG and/or dividends. Company is 13 years old.

Any thoughts? I appreciate and acknowledge the commentary is general.

Our broker is working on it, but seems confused (apparently most self-employed are only single-director entities, or sole traders, so this isn't common for them).

Thanks in advance.

 

I take it the other director is not involved in the loan application. That might mean that only 50% of the company profits can be assigned to yourself and income for servicing purposes (along with your personal incomes).

Retained profits don't really help towards servicing, lenders can only use the money made on an ongoing basis for these purposes. If you had a long term plan to buy property, you could pay these profits to yourself as dividends to prop up your personal income to improve servicing.

It doesn't sound as if there's anything really complicated in your circumstances, but it's hard to tell you what you can borrow or what the best solution is without seeing the paperwork.

Here's the executive summary of how lenders would calculate your borrowing capacity:
* They look at your personal income, plus the business profits (given you could distribute this to yourself if you want to). This is seen as personal income and they apply the applicable tax rates to it.
* They look at your various expenses. Living expenses, debts, credit cards, any other financial commitments you have.
* The difference is what can be applied to paying the loan.

The tricky part is at each stage, lenders have individual policies of how they determine specifically what those figures are. At a high level they follow the same overall process, but in the details there can be differences which means different outcomes from one lender to another.

Beyond what's in the tax and personal returns, you could use a lo doc loan. This will rely on BAS statements for income and tends to be a bit more flexible in how its assessed. These loans are more expensive (both rates and fees), but the flexibility might be more suited to your circumstances.

 

Lenders all will do a ASIC search on a individual as part of any loan application. They look for Directorships, not shareholdings. And will have a process to request more info. Sometimes the broker may need further info or a accountants letter etc esp for non trading entities but its not uncommon for an accountant to be asked to indicate something like the 2020 draft profit etc or confirm no liabilities and all tax obligations are up to date and can be met from existing capital. There are also examples where a Director lacks control and the lender may exclude some requirements eg Alan Joyce applying for a home loan. Have seen this where a local Director may be part of a foreign controlled board for example.

Certainly a broker can assist this and may be better than DIY loan applications direct to a lender.