Scenario: a self-employed borrower with irregular income

This page follows a hypothetical self-employed borrower who wants to buy or refinance a property but finds that a mainstream lender will not lend the amount they expected. The person, the business and the lenders are invented for illustration. The aim is to show how the situation generally unfolds, what the options are, and where Privet tools can help you test your own numbers.

The situation

Our hypothetical borrower has run a small trade business for several years. Two years ago the business was modest. Over the last twelve months, after winning larger contracts, revenue has grown strongly. The borrower has found a property and has a deposit saved, and expects the bank to lend against today's income.

The bank, however, assesses income from the borrower's lodged tax returns and notices of assessment. The most recent lodged return covers a year before the growth. On top of that, the borrower's accountant claimed legitimate deductions, such as equipment and vehicle costs, that reduced taxable income. The bank's assessed income is therefore much lower than what the business is earning now, and the borrowing capacity it offers falls short.

Why lenders look backwards

Lenders that offer regulated home loans must make reasonable inquiries and take reasonable steps to verify a borrower's financial situation. For an employee, payslips and an employer letter usually do this. For a self-employed person, lodged tax returns are the most reliable third-party evidence available, which is why many lenders rely on them. Some lenders add back certain non-cash deductions, such as depreciation, when calculating income; others do not. These policy differences are one reason the same borrower can receive different answers from different lenders.

Lenders also tend to treat a sudden jump in income cautiously, because a single strong year may not continue. Some will average two years, or use the lower of the two.

The options people consider

Waiting for the next return

If the strong year is about to end, the simplest route can be to lodge the next return promptly and apply once the notice of assessment arrives. This keeps the borrower on standard pricing. The trade-off is time: the property may be sold to someone else in the meantime.

Trying a lender with a different policy

Some lenders accept one year of returns, add back more deductions, or consider the most recent year alone. Comparing policies, either directly or through a licensed broker, may close the gap without changing loan type. Each application can appear on your credit report, so it helps to understand a lender's policy before formally applying.

An alt-doc loan

An alt-doc loan uses other evidence of income, typically recent BAS statements, business bank statements, or a declaration from the borrower's accountant. The low-doc and non-conforming loans guide explains how these work. They generally cost more than a full-documentation loan and may require a larger deposit, which means a lower loan-to-value ratio. For a home loan, the lender must still assess affordability.

A short-term private loan, then refinance

Where timing is urgent, some borrowers use a short-term first mortgage private loan secured against the property, then refinance to a mainstream loan once the stronger tax return is lodged. This depends on that refinance actually being available later. If the next return is weaker than hoped, or lender policies tighten, the borrower may be left holding expensive short-term debt. The private lending overview covers how these lenders assess loans and the costs to ask about.

Working out what it really costs

The cheapest-looking option is not always the cheapest overall. To compare fairly, the borrower would:

1. Enter each offer's rate, term and fees into the loan cost estimator to see the total cost, not just the rate.
2. Use the repayments calculator to check that monthly repayments fit the business's cash flow in a slow month, not just an average one.
3. Use the LVR calculator to see how the deposit size changes the loan-to-value ratio, since a higher ratio can rule out some lenders or add mortgage insurance.
4. For a private loan with a planned refinance, add the cost of the short-term loan, its exit fees, and the establishment costs of the replacement loan.

A useful stress test is to assume the refinance takes six months longer than planned and see whether the borrower could still carry the cost.

Documents to gather early

Being organised shortens assessment and reduces last-minute surprises. Lenders commonly ask self-employed borrowers for:

• Personal and business tax returns and notices of assessment.
• Recent BAS statements.
• Business and personal bank statements.
• An ABN and evidence of how long the business has traded.
• An accountant's contact details or a signed accountant's declaration.
• Details of existing debts, including tax debts and any payment arrangements with the ATO.

The documents lenders ask for lesson has a fuller checklist.

Honesty in the application

Under pressure to borrow more, some people are tempted to round up income or let someone else fill in their figures. This is a serious mistake. You are responsible for what your application says, and an inflated figure can lead to a loan you cannot afford. Check every number before signing, keep copies, and be wary of anyone who suggests adjusting figures. The scams and red flags guide lists other warning signs.

Questions to ask before choosing a path

1. How does this lender assess self-employed income, and does it add back any deductions?
2. Is this loan full-doc, alt-doc or private, and what does that mean for the rate, fees and maximum LVR?
3. If I plan to refinance later, what would the replacement lender need to see?
4. What is the total cost over a realistic period, including exit and establishment fees?
5. Is the lender licensed, and is it a member of AFCA?

If repayments become difficult later, the National Debt Helpline offers free financial counselling. Privet is not a lender, broker or adviser, and this scenario is general information only. If you would like to discuss your situation with a provider, you can make an enquiry.