Avoid These 7 Mistakes When Applying as Self-Employed

Self-employed borrowers need at least two years of tax returns and financials to satisfy most lenders.

The requirement catches many off guard, particularly if you've been trading for three years but only declared modest income in your first year while reinvesting heavily. Lenders average your income across those two years, which means a strong second year can be dragged down by a cautious first year on paper. For someone applying in Strathfield, where the local property market reflects a mix of established family homes and newer apartment developments around the town centre, that averaged income figure determines whether you can borrow enough to secure what you're after.

Declaring Too Little Income While Growing Your Business

Many self-employed borrowers minimise taxable income during growth phases to reduce their tax bill. That approach works until you apply for a home loan.

Consider a contractor who earned $95,000 in their first full year and $130,000 in their second year, but claimed $22,000 in deductions each year to bring taxable income down to $73,000 and $108,000 respectively. The lender averages those two taxable figures and assesses serviceability on $90,500. That difference between gross income and what the lender can actually use may reduce borrowing capacity by $80,000 or more at current variable rates, depending on other commitments. If the property you're looking at sits near the upper limit of what you thought you could borrow, that gap can mean the difference between pre-approval and decline.

Mixing Personal and Business Expenses in the Same Account

Lenders need a clear picture of your income and spending, and mixed transactions make that picture unclear. When your accountant prepares your financials, they separate business costs from personal drawings. But when a lender's credit assessor reviews your bank statements, they see everything together. A large withdrawal might be a legitimate business expense, or it might be personal spending. Without clarity, they assume the worst.

Separate accounts from the outset remove that ambiguity. Business income goes into a business account, business expenses come out of that same account, and you transfer a regular amount to your personal account for living costs. The lender can then see a stable pattern of personal drawings, which supports your declared income, and they can assess your household spending without second-guessing every transaction.

Applying Before Your Tax Returns Are Lodged and Assessed

Most lenders require your most recent two years of Notice of Assessments from the ATO, not just prepared financials from your accountant. If your tax return for the last financial year has been prepared but not yet lodged, or lodged but not yet processed, the lender can only use the previous year's assessed figure. That may mean they assess you on older, lower income.

In our experience, this issue arises most often between July and October, when the previous financial year has ended but returns are still being finalised. If you're planning to apply during that window, lodge early. The ATO typically processes straightforward returns within two weeks. If your return is more involved, factor in a longer timeframe or consider waiting until the assessment is complete before submitting your application.

Failing to Separate Company Income from Personal Income

If you operate through a company structure, the company's profit is not automatically your income. Lenders assess what you actually receive as salary, dividends, or director's fees. A company that generates $200,000 in profit but only pays you $80,000 in salary and dividends means the lender assesses you on $80,000, not $200,000.

Sole traders and partnerships are different. For those structures, the business income flows directly to you personally, and lenders can use the full net profit figure after deductions. But if you've set up a company for tax or liability reasons, you need to show a consistent history of drawings that match the income level you're claiming. If you've left money in the company to manage cash flow or reduce personal tax, that decision limits what a lender can verify.

Not Keeping Evidence of Regular Contract or Client Renewals

Lenders assess whether your income is stable and likely to continue. For a self-employed borrower who relies on a small number of clients or contracts, evidence of renewals or ongoing work becomes part of that assessment.

Strathfield has a strong local business community around the town centre and along The Boulevarde, with many established service providers, consultants and tradespeople working across the Inner West. If your work is project-based or relies on repeat clients, keep signed agreements, renewal notices, or statements of work that show continuing engagement. A contractor who can demonstrate three years of recurring work with the same two or three clients presents differently to a contractor whose client list turns over every six months.

Assuming ABN Age Equals Trading History

Your ABN might be five years old, but if you only began trading actively two years ago, lenders assess you on two years. The date your ABN was registered is not the same as the date you started generating income.

This distinction matters if you registered an ABN as a precaution or for a side project that didn't proceed, then started your current business later under the same ABN. Lenders rely on your tax returns and BAS statements to confirm active trading. If your first year of lodged tax returns was two years ago, that's your track record, regardless of when the ABN was issued. If you're approaching that two-year mark but not quite there yet, waiting a few months to lodge your second return may be more productive than applying now and facing a decline.

Overlooking How Your Business Structure Affects LMI and Rates

Some lenders treat self-employed borrowers as higher risk, particularly if you're applying with a deposit below 20%. That perception can lead to higher interest rates or stricter LMI loading, depending on the lender's credit policy.

Not all lenders apply the same loadings. Some assess self-employed applicants the same as PAYG employees if your income is clear and your financials are well-prepared. Others add a margin to the rate or require a larger deposit before they'll consider the application. A broker who works regularly with self-employed clients in the Strathfield area will know which lenders apply which policies and can position your application accordingly. In one scenario we reviewed recently, the difference between two lenders on the same application was 0.35% on the variable rate and a $9,000 difference in LMI premium, purely because one lender's policy treated the applicant's company structure as higher risk.

If you're self-employed and looking to apply for a home loan in Strathfield, your documentation and structure matter as much as your income. Call one of our team or book an appointment at a time that works for you.

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