How Being Self-Employed Affects Your Borrowing Power

One of the most common frustrations I hear from self-employed clients is that they feel like they should be able to borrow more than lenders will offer them. In many cases, they're right — their actual income and cash flow are strong, but the way that income is reported on paper (particularly after tax minimisation) doesn't tell the full story.

Let me explain how lenders calculate borrowing power for self-employed people, and what you can do about it.

How Lenders Calculate Income for Employees

For employees, it's simple. Take the annual gross salary, confirm it with payslips and an employer letter, and use it as the income figure. Clean, straightforward, verifiable.

How Lenders Calculate Income for the Self-Employed

For self-employed borrowers, it's more complex. Most lenders will look at your taxable income as declared in your personal tax return. If you run your business through a company or trust, they'll also look at the business financials. The income figure they use is typically an average of the last two years.

The Tax Minimisation Problem

Here's the tension: you've (quite legitimately) minimised your taxable income through depreciation, vehicle deductions, home office expenses, and other business deductions. That's great for your tax bill, but it reduces the income figure lenders use to calculate your borrowing power.

A business owner earning $150,000 in actual income might show taxable income of $90,000 after deductions — and that $90,000 is what many lenders will use to assess borrowing power.

Add-Backs: A Key Concept

Some lenders allow 'add-backs' — where certain non-cash deductions (like depreciation) are added back to your taxable income for the purposes of assessing borrowing power. This can significantly increase the income figure a lender will work with. Not all lenders offer this, which is one reason why the right lender makes a big difference for self-employed borrowers.

Low Doc Loans and Borrowing Power

Low doc loans use alternative income verification (BAS, bank statements, accountant's letter) which may present a more accurate picture of your actual income. However, borrowing power under a low doc loan is sometimes capped below what's available on full-doc terms.

What Can You Do to Increase Your Borrowing Power?

The most effective thing is to have your tax returns up to date and as accurate as possible. If your income has grown significantly in the most recent year, a lender who uses just the most recent year's income (rather than a two-year average) will give you a higher figure. Paying down existing debts also helps, as it reduces the obligations lenders factor into their calculations.

Let's Work Out What You Can Borrow

Every self-employed borrower's situation is different. If you'd like to understand what you could actually borrow and how different lenders would assess you, I'm happy to run through it with you. Get in touch and let's work out your true borrowing power.