Self Employed Home Loan – using add backs to increase your borrowing capacity

When applying for a self employed home loan your taxable income isn’t the same as the actual income that can be used to assess your capacity to meet your commitments, including the repayments for any new loans, therefore some lenders add back any expenses incurred that reduced your taxable income.

By adding back expenses you can increase your assessable income and your borrowing capacity !

Some examples of add backs for a self employed home loan

Depreciation: Depreciation is a tax deduction, however it is not a day-to-day cash expense. For this reason some lenders add it back to your taxable income but amount of allowance varies depending on the nature of asset being depreciated. Assets with a high turnover may have a reduced amount of depreciation permitted as an add back by the lender.

Additional superannuation: If you have made lump sum or regular voluntary super contributions in excess of your minimum statute requirements then these extra amounts can be added back in most cases.

Net Profit Before Tax (NPBT): If you have profits that you have retained in your company then these can be taken into account as well, but only for the period on which the credit assessment is based. If you don’t own the entire company then lenders will assess your share of those retained profits.

One off expenses: If you had an extraordinary expense then the lender will often add this back. Before applying for a self employed home loan you will need to get a letter from your accountant confirming this was an extraordinary one-off expense.

Interest & lease expenses: If you have a business loan or investment loan, then it is likely that you have tax deductions for the interest that you have paid. Lenders will add this back as they will assess all commitments that you have separately in their serviceability calculator.

Rental property expenses: Depreciation on your properties, management fees, repairs and other rental property deductions such as negative gearing are all added back. Rental income is also deducted from your income as lenders assess this separately to your main income.

Company car: If you have a car that is used by your business and yourself then it is likely that you have deducted many of the expenses associated with this car for tax. Lenders do not add this back, however they often will add back up to $6,000 in gross income to compensate for this if it is the sole vehicle within the family unit. Where a private vehicle is maintained within the family then no allowance will be considered.

Trust distributions: If you have your business in a discretionary trust and have chosen to distribute income to some of your family members then in most cases this can be added back. Note that many lenders do not accept this add back, or will only do so if you provide a letter from your accountant to confirm that the beneficiaries are not financially dependent on this income.

So assessing which add backs can be applied for a self employed home loan and with which lender can be very complicated, this can result in reducing your borrowing capacity, by using the services of an experienced mortgage broker you will ensure that you have maximised your borrowing capacity.

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