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    Contrary to popular belief, there is no strict requirement in New Zealand that if you’re self-employed or a contractor you must have been in business for at least two years before a bank will consider giving you a home loan.

    As Aseem Agarwal, Head of Mortgages at Global Finance explained, documents prepared by accountants and backed up with annual tax returns and GST returns make it possible for banks to assess loan eligibility even if your business has been in operation for less than two years.

    Lenders have flexibility

    When approving a home loan, banks take a number of factors into consideration, and they have flexibility when assessing the eligibility of individuals with irregular income. They can use methods like profit and loss statements, financials, and cash flow forecasts to evaluate financial stability.

    So, if you’re self-employed or a contractor, it’s important to focus on presenting a strong case supported by financial documents that provide a comprehensive overview of income rather than being put off by the misconception that a two-year business history is a strict requirement for getting a mortgage approved. Each case is considered individually, and with the right advice, documentation and financial planning, you can successfully get a home loan.

    Let’s look at some examples Aseem Agarwal gave on how banks assess loan eligibility for those who are self-employed, contractors, or new business owners.

    The issue of irregular income

    Aseem Agarwal explains: “To give banks confidence in scenarios where income can be irregular, we advise clients to provide a profit and loss statement prepared by an accountant. Coupled with annual tax and GST returns, it offers a clear picture of an individual’s or business’ earnings over a certain period.”

    Knowing that your income may tend to fluctuate is part of why banks and lenders are so critical with self-employed and contractor loan applications. They are aware that earnings can vary depending on the month or week – you may record a low month if you’re waiting for an invoice, conversely if you’ve just completed a big job, you’ll have a higher income for that period. This is why mortgage lenders want to see income trends over time to make sure you’re able to repay your loan. If you’ve had any major expenses or there have been some dramatic changes in your sales figures, you’ll need to be able to explain why.

    By presenting a profit and loss statement, backed by your accountant prepared financials, the bank can have more confidence in assessing your annual income, rather than relying on month-to-month variations.

    When you’re a new business

    Aseem goes on to say, “For businesses with less than 12 months of operation, banks may also accept a cash flow forecast prepared by an accountant. While the bank may discount or downplay the projected income somewhat to meet lending criteria, it allows for income that hasn’t yet been realised to be taken into consideration, provided, of course, it aligns with reasonable assumptions.”

    To help decision-makers determine how stable your business is and its likely future, they’ll want to know more about what you do in your business, and how much experience you have in your field. Combining that information with a cash flow forecast prepared by an accountant to show likely income and future expenses will help get you closer to getting a home loan.

    Addressing setbacks and changes in business performance

    It’s also important that you’re able to explain and justify your financial history. Dramatic dips and rises in sales numbers, or large expenses, can set off alarm bells. But if you have a reasoned explanation, it can make a difference. You’ll need to be able to show what has changed; what led to previous bad years or what has led to the turnaround in the business in the current financial year.

    “Even if a business faced challenges in the past, banks can consider the current financial year’s performance. A cash flow forecast outlining expected earnings for the remaining year can be pivotal.”

    Consider the impact of external factors like the COVID-19 pandemic. Aseem gave the example of a hair salon. Like many businesses, they were not trading because they were in lockdown.

    “They were by no means a bad business, but the nature of business didn’t allow them to open. Now they’ve gone back to normal levels. After one or two bad years, they’re now trading at full capacity. Therefore, the bank is happy to look at the current year’s performance and base their decision on that income level.”

    By providing a cash flow forecast explaining the turnaround and emphasising positive changes, the bank can look at the current year’s performance when making loan decisions.

    Professional help can make the difference between getting a mortgage or not

    When you’re self-employed, a contractor or have a new business and are looking to apply for a mortgage, it’s best to get in the professionals, such as an accountant and a mortgage broker.

    With the right financial documentation, such as profit and loss statements and cash flow forecasts, and support from Global Finance’s mortgage brokers, you can successfully present a strong case for loan eligibility, even in the face of setbacks or changes in business performance.

    Dispelling the two-year myth

    Aseem Agarwal, head of mortgage team at Global finance says with professional presentation of your loan application, “Our mortgage brokers are here to assist you , providing tailored solutions for self-employed individuals and new business owners. With the right approach and documentation, securing a home loan is not limited by the number of years in business.”

    The team of expert financial advisers at Global Finance can explain exactly what is needed and work with you to ensure you give a well-presented picture to the bank or lender.

    Your accountant can prepare your financials in a way that clearly shows your financial position. They can prepare cash flow forecasts to show likely income and expenses so the lender can have the confidence to base their decision on that level of trading.

    Together, we can help you secure a home loan. So, contact a Global Finance broker today for expert advice and support with your mortgage application on 09 2555500 or send an email to info@globalfinance.co.nz

    The information and articles published are true to the best of the Global Finance Services Ltd knowledge. Since the information provided in this blog is of general nature and is not intended to be personalized financial advice. We encourage you to seek Financial advice which is personalized depending on your needs, goals, and circumstances before making any financial decision. No person or persons who rely directly or indirectly upon information contained in this article may hold Global Financial Services Ltd or its employees liable.