How do lenders calculate my income?

When you work for yourself, you may pay yourself a consistent income, but, more likely, your earnings fluctuate month to month. You may have experience managing your personal cash flow to accommodate this, however lenders tend to look for stability and a track record of making ends meet. So, if you are self-employed and want to take out a home loan, how do lenders calculate your income when assessing your application?

What will the lender look at when calculating income?

The way your income will be calculated will vary depending on the lender. For example, most lenders will require at least two years’ tax returns from which they will calculate your average income. Some lenders may only use the lowest figure from the last two years, some may accept one years’ tax return and it may be possible for some loan types to only require six months’ payslips along with a letter from your accountant. 

What might the lender “add back” when calculating income?

The income on your tax returns isn’t necessarily the final figure lenders will consider. They could also look at the expenses that you’ve incurred that reduced your taxable income, but aren’t recurring, and add these back. This can actually boost your overall income. The expenses that may be added back, depending on the lender, include:

  • depreciation (such as on vehicles or investment properties) 
  • additional superannuation contributions you have made 
  • asset tax write-offs
  • Net Profit Before Tax that have been retained within the business
  • one-off purchases, such as a company car 
  • interest repayments for a business loan

There are additional expenses that could potentially be added back, which your broker can speak with you about.

What if I have less than two years’ tax returns

If you have been running your business for more than one year, but less than two, there may be some lenders who will still consider your application. If your business has been operating for less than one year, it could be trickier as lenders like to see consistency with your income. It is still worth speaking with your broker to find out what options may be available to you.

Having a broker on side

If you’re self-employed and applying for a loan, you will likely need to provide more documents than someone who is an employee to demonstrate your dependability in repaying the loan. We know the ins and outs of the different lenders’ requirements and can help you understand what options may be right for your unique circumstances and put your best foot forward.


Published: 4/5/2022

Have a question ?