Note to the self-employed: The time for organising EOFY statements is now
Being self-employed, whether you’re a sole trader, freelancer, in a partnership, or the director of your own company, can provide a lot of satisfaction and flexibility. And it’s on the rise; the total number of self-employed people increased by 7.5 percent in the year to March 2021, reaching 355,000 in New Zealand (Statistics New Zealand). However, when you want to get a mortgage or alter your current mortgage in some way, for those who are self-employed, there is a bit of extra work needed to prepare the documents to prove your income and secure your loan for that dream house.
The proof is in the (financial) pudding.
When considering you for a mortgage, a lender wants to feel confident that you have the income to service the repayments – after all, it’s usually hundreds of thousands of dollars. When you work for someone else, proof of income is easy; you generally receive regular payslips or have an employment contract that states your remuneration. When you work for yourself, proof of income means annual end-of-financial-year (EOFY) statements. These should include a balance sheet, a statement of financial performance, a statement of financial position, a statement of changes in equity, and a snapshot of the shareholder's current account. Most lenders will generally ask for a minimum of two complete years of financial reports when completing their assessment.
Act now so you’re ready for later.
Our most important message to any self-employed person looking to potentially buy a home or extend their mortgage is to start organizing a draft set of your financial statements in April as soon as the financial year ends, rather than leaving it for later in the year. From our experience, many put it off for six months or more, which can be problematic if you want to act quickly to secure a mortgage, particularly if you have a busy accountant. As your mortgage advisers, we can use draft financials for the six months following April 1st, giving you plenty of time to make any adjustments to your finals. But once we’re six months through the financial year, the window closes, and we need to have the final statements. Without these statements, we can’t calculate how much you may be able to borrow. Remember, it’s usually in your best interest to be using the most up-to-date financial information as businesses generally improve year-on-year, and lenders can't rely on outdated data.
Have a newer business and want to borrow?
It can be a bit trickier if you’re new in business, as your track record of income-earning is short. In this case, you can work with your accountant to put together a cash flow forecast that shows a projection of your earnings. As it’s a forecast, lenders will look at it on a case-by-case basis and generally scale it; for example, they may only allow for 70 percent when calculating the amount you can borrow, with 30 percent allowed for error given it’s a forecast, not actuals. Other options that may be accepted are providing contracts or client agreements that signify future income.
Our closing words: act now and sort your EOFY statements.
Like with most things, as a self-employed person, your financial statements shouldn’t be left to the last minute. Act now to make the borrowing process run smoothly. As always, get in touch with our team if you have any questions about your requirements or mortgages – we’re here to help.