What Lenders Actually Look for When You're Self-Employed
Lenders assess self-employed income differently because your earnings fluctuate and you control how much you declare. Most lenders require two full years of tax returns, plus recent financials showing your business is still performing. They'll calculate your income based on taxable income, not your turnover, which means deductions that reduce your tax bill also reduce what you can borrow.
The application process takes longer because lenders verify every document with the ATO and your accountant. If you're a sole trader or partner in a business, they'll look at your individual tax returns. If you operate through a company or trust, they'll need company financials, business activity statements, and sometimes a letter from your accountant explaining how much you're entitled to draw.
For borrowers in Ferntree Gully, where many operate small businesses in trades, retail, or services around Mountain Gate or the main shopping precinct, this means planning ahead. If you're thinking about buying or refinancing in the next 12 to 24 months, your financial structure today determines what you can borrow tomorrow.
How Income Calculations Change Your Loan Amount
Your taxable income is the starting point, but lenders make adjustments. Add-backs like depreciation and certain one-off expenses can increase your assessed income, but only if your accountant documents them clearly. Some lenders also average your income across two years, which helps if one year was stronger than the other.
Consider a borrower who runs a landscaping business and earned $85,000 in taxable income one year and $72,000 the next. A lender might average those to $78,500, then add back $12,000 in depreciation their accountant claimed on equipment. That gives a total assessed income of $90,500, which determines the loan amount they can access.
Without proper documentation, that same borrower might only be assessed on the lower $72,000 figure. The difference can reduce borrowing capacity by $80,000 or more, depending on other commitments. This is why working with both your accountant and a mortgage broker in Ferntree Gully who understands self-employed lending makes a tangible difference.
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Why Two Years of Tax Returns Are Not Always Enough
Most lenders want two years of tax returns lodged with the ATO, but some require three if your income dropped in the most recent year. If you've been self-employed for less than two years, your options narrow significantly. A handful of lenders will accept one year of returns if you moved from PAYG employment in the same industry, but they'll charge a higher interest rate or require a larger deposit.
Your most recent business activity statements also matter. Lenders use them to confirm your income hasn't dropped off since your last tax return was lodged. If your BAS shows declining revenue or irregular lodgement, expect the lender to ask for an explanation or decline the application altogether.
In our experience, borrowers who lodge their tax returns late or have gaps in their BAS lodgement history face the most delays. If you're planning a home loan application in the next six months, check your ATO portal and make sure everything is current.
The Role of Genuine Savings and Deposit Size
Self-employed borrowers usually need a larger deposit than PAYG employees. Where a wage earner might get approval with a 5% deposit plus Lenders Mortgage Insurance, most self-employed applicants need at least 10% to 15% in genuine savings. Lenders define genuine savings as funds you've saved over at least three months, held in your own name, and not borrowed from elsewhere.
If you're buying in Ferntree Gully's more affordable pockets near Burwood Highway or closer to Upwey, a 10% deposit still gives you access to a range of lenders. But if your business structure is complex or your income has been inconsistent, you might need 20% to avoid LMI or access home loan pre-approval with confidence.
Gifts from family can make up part of your deposit, but lenders require a signed declaration confirming the funds don't need to be repaid. Funds held in your business account for more than three months may also qualify, but only if your accountant provides a letter confirming the money isn't required for business operations.
What Happens When Your Business Uses a Company or Trust
If you're a company director or beneficiary of a trust, lenders need to see both your personal tax returns and the entity's financial statements. They'll also want to know your ownership percentage and whether you can draw income freely. Some lenders treat discretionary trust income differently depending on whether distributions are consistent year to year.
As an example, a borrower who receives $95,000 annually from a family trust that owns a medical practice might face questions if the trust also distributes to other family members or retains earnings. The lender needs proof that future distributions will continue at the same level, which usually means a letter from your accountant and copies of trust deeds.
This added complexity is why self-employed applicants benefit from working with a broker who can match your specific structure to the right lender. Not every bank understands discretionary trusts or self-managed super fund loans, and applying to the wrong one wastes time and leaves a credit enquiry on your file.
How to Prepare Before You Apply
Start by gathering two years of full tax returns, including the Notice of Assessment from the ATO for each year. Add your most recent BAS statements, profit and loss statements, and a current balance sheet if your accountant prepares one. If you've claimed significant deductions, ask your accountant to provide a summary of add-backs that might increase your assessed income.
Check your credit file to make sure there are no missed payments or defaults. Even one missed phone bill can affect approval if your application is borderline. If you're planning to refinance or buy within the next year, avoid taking on new debt or changing your business structure until after settlement.
For Ferntree Gully borrowers, this preparation is especially important if you're buying a property that requires a quick settlement or competing in a market where pre-approval gives you an edge. The more organised your paperwork, the faster your application moves.
Variable, Fixed, or Split: Which Loan Structure Suits Self-Employed Borrowers?
Self-employed income can vary month to month, so loan features like an offset account or redraw facility give you flexibility when cash flow is tight. A variable rate loan with a linked offset lets you park business income temporarily and reduce the interest you're charged without making it unavailable if you need it.
Some borrowers prefer a split loan, fixing part of their loan for rate certainty while keeping the rest variable for flexibility. If you're earning well now but expect a lean period ahead, fixing a portion locks in your repayments so you know exactly what's due each month.
Interest-only repayments are another option if you're using the loan for an investment property or want to keep repayments lower while you grow your business. But lenders assess interest-only applications more carefully for self-employed borrowers, and you'll need a stronger income position or larger deposit to qualify.
Using Equity to Invest or Refinance
If you already own a home in Ferntree Gully and your business is going well, you might be able to use the equity you've built to invest in another property or fund business growth. Lenders calculate usable equity based on your property's current value minus what you owe, then apply an LVR limit of 80% in most cases.
Your income still needs to support the total debt, so if you're earning $90,000 and already have a $450,000 loan, accessing another $150,000 might push your repayments beyond what the lender will approve. Running a borrowing capacity check before you commit to a purchase contract avoids disappointment later.
For self-employed borrowers, equity can also be used to refinance and consolidate business debts or improve your loan structure. If your current loan doesn't have an offset account or your rate is higher than current market rates, refinancing might improve your cash flow and reduce the interest you're paying overall.
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Frequently Asked Questions
How do lenders calculate income for self-employed borrowers?
Lenders use your taxable income from tax returns, not your turnover. They may add back certain deductions like depreciation and average your income across two years. Your accountant's documentation of add-backs and consistent distributions is critical for maximising your assessed income.
Can I get a home loan if I've been self-employed for less than two years?
Some lenders will accept one year of tax returns if you moved from PAYG employment in the same industry, but your options are limited. You'll likely face a higher interest rate or need a larger deposit, and most mainstream lenders require two full years.
What deposit do self-employed borrowers need?
Most self-employed borrowers need at least 10% to 15% in genuine savings, compared to 5% for many PAYG employees. If your income is inconsistent or your business structure is complex, you may need 20% to avoid LMI or access a wider range of lenders.
Why do lenders ask for business activity statements?
Lenders use your most recent BAS to confirm your income hasn't dropped since your last tax return was lodged. Declining revenue or irregular lodgement raises concerns and can delay or derail your application.
What documents do I need if my business uses a company or trust?
You'll need personal tax returns, the entity's financial statements, proof of ownership or entitlement, and usually a letter from your accountant confirming future distributions. Lenders assess company directors and trust beneficiaries more carefully due to the complexity of income structures.
