Documenting Income for Self-Employed Mortgage Applications
For self-employed Kiwis, securing a mortgage can feel like navigating a complex maze. While homeownership remains a cherished goal for many New Zealanders, proving income and financial stability without a traditional payslip can present unique challenges. This article aims to guide self-employed individuals through the process of documenting income for mortgage applications in New Zealand.
The Self-Employed Landscape in New Zealand
According to Statistics New Zealand, approximately 1 in 20 workers in New Zealand are self-employed. This significant portion of the workforce includes tradespeople, IT contractors, freelancers, and small business owners. While self-employment offers flexibility and autonomy, it can complicate the mortgage application process.
Understanding Lender Requirements
Most New Zealand banks and traditional lenders typically require self-employed applicants to provide at least two years of financial documentation. This requirement allows lenders to assess the stability and consistency of your income. However, some non-bank lenders may offer more flexible options for those who have been self-employed for shorter periods.
Essential Documentation for Self-Employed Applicants
When applying for a mortgage as a self-employed individual, you’ll need to prepare the following documents:
- Financial Statements: Provide at least two years of accountant-prepared financial statements, including profit and loss statements and balance sheets.
- Tax Returns: Submit personal and business tax returns for the past two years.
- Bank Statements: Offer three months of personal and business bank statements.
- GST Returns: If your business is GST registered, include recent GST returns.
- Proof of Business Registration: Provide your New Zealand Business Number (NZBN) registration details.
- Accountant’s Declaration: Some lenders may accept a letter from your accountant verifying your income.
Strategies for Effective Income Documentation
- Maintain Accurate Records: Keep detailed, up-to-date financial records throughout the year. This practice not only aids in mortgage applications but also benefits your overall business management.
- Work Closely with Your Accountant: Engage regularly with your accountant to ensure your financial statements accurately reflect your income. Christopher Walsh, founder of MoneyHub, advises, “If your biggest asset is your health, having even a short-term illness which causes you to miss work can have significant financial consequences.” This underscores the importance of maintaining comprehensive financial records.
- Consider Your Tax Strategy: While minimising tax liabilities is often a goal for self-employed individuals, it’s important to balance this with demonstrating sufficient income for mortgage purposes. Discuss this balance with your accountant.
- Prepare Year-to-Date Financials: Some lenders may request current year financial information, especially if you’re applying close to the end of the financial year. Be prepared to provide these if asked.
- Explain Income Fluctuations: If your income varies significantly from year to year, be prepared to explain these fluctuations to potential lenders.
Alternative Documentation Options
For self-employed individuals who don’t meet traditional lending criteria, some lenders offer alternative documentation (Alt Doc) loans. These loans may require less stringent income proof, such as:
- Business activity statements
- Recent bank statements showing business income
- An accountant’s declaration of your income
While these loans can be more accessible, they often come with higher interest rates to offset the perceived increased risk.
The Role of Mortgage Advisers
Navigating the mortgage application process as a self-employed individual can be complex. Many Kiwis find value in working with a mortgage adviser who understands the nuances of self-employed income. These professionals can help you present your financial situation in the best light and may have access to lenders who specialise in self-employed mortgages.
Looking Ahead: Future Trends
As the nature of work continues to evolve, with more Kiwis embracing self-employment and the gig economy, it’s likely that lenders will adapt their processes to better serve this growing segment of borrowers. Some non-bank lenders are already offering more flexible options, and this trend may continue.
While documenting income for a mortgage application as a self-employed individual in New Zealand can be challenging, it’s far from impossible. By maintaining detailed financial records, working closely with financial professionals, and understanding lender requirements, self-employed Kiwis can position themselves for mortgage success.
Remember, every self-employed situation is unique. What works for one applicant may not work for another. It’s crucial to seek personalised advice from financial professionals and mortgage advisers who understand the New Zealand lending landscape and can guide you through the process based on your specific circumstances.
With careful planning and the right approach to documentation, self-employed individuals can turn their homeownership dreams into reality, joining the ranks of proud Kiwi homeowners across Aotearoa.