If you work for yourself, your income can look very different from the income shown on a standard payslip.
You might pay yourself a salary, take drawings from your business, earn contracting income or leave some profits inside the company. Because of this, lenders often need more information to understand how much income is actually available to support a mortgage.
So, how do banks calculate self-employed income for a mortgage in NZ? The answer depends on the lender and your business structure, but lenders will generally look at your financial records, income consistency, existing debts, expenses and ability to afford the proposed repayments.
What Counts as Self-Employed Income?
Self-employed income is not always as simple as taking the total sales of your business and calling that your income.
A business might generate $200,000 in sales but have substantial costs for wages, stock, vehicles, rent, equipment, insurance and other expenses. What matters to a lender is the income that can reasonably be used to support the mortgage.
For someone applying for a self employed mortgage NZ, the lender may need to understand:
- Business revenue
- Business expenses
- Net profit
- Salary or wages paid to the owner
- Drawings
- Other personal income
- Existing financial commitments
- The stability of the business
The exact method can vary between lenders.
What Documents Do Banks Ask For?
One of the biggest differences between an employee and a business owner is the evidence required.
For a standard employee, income might be supported by payslips and employment records. For a self-employed applicant, lenders may request financial statements and other business information. For example, ANZ says self-employed applicants need to provide financial statements, preferably through their accountant. Westpac also says self-employed applicants may need recent financial statements or relevant IRD documentation showing business and personal income.
Depending on the lender and your circumstances, you may need:
- Recent financial statements
- Profit and loss statements
- Balance sheets
- IRD tax information
- Business bank statements
- Personal bank statements
- Evidence of current debts
- Details of business liabilities
- Evidence of ongoing contracts or income, where relevant
Having these documents ready can make the application process easier.
Do Banks Use Business Revenue as Income?
Usually, no. This is one of the most important points for business owners.
A lender generally needs to understand what your business earns after considering the costs of operating the business. For example, imagine a business has:
- Annual sales: $300,000
- Business expenses: $190,000
- Remaining profit: $110,000
The $300,000 turnover does not automatically mean the lender will treat $300,000 as the applicant's income. The lender will assess the financial information and apply its own lending methodology. This is why understanding your accounts before applying can be valuable.
What Are Drawings?
Drawings are amounts taken from a business by its owner. For example, a sole trader may transfer money from the business account to their personal account throughout the year.
However, the amount you regularly transfer to yourself does not necessarily tell the full story about the business's ability to support that income. A lender may look at the underlying business accounts to understand whether the income is sustainable. This is particularly important when someone has a high level of drawings but relatively low business profit.
What About Company Owners Who Pay Themselves a Salary?
If you operate through a company, you might pay yourself a regular salary.
That salary can form part of the income assessment, but a lender may also want to understand the company's financial position. For example, they may need to know:
- How profitable the business is
- Whether the company has outstanding liabilities
- Whether profits are consistent
- How long the business has operated
- Whether the salary is sustainable
- Whether there are other shareholders
This helps the lender look beyond a single payslip.
How Many Years of Business Income Do Lenders Look At?
There is no single rule used by every lender.
Some lenders may want more than one year's financial information, particularly where the business income is variable or the business is relatively new. Others may have different requirements depending on the type of self-employment, business structure and strength of the application. For example, Westpac's published home loan application guidance asks self-employed applicants for recent financial statements or specified IRD records. This is one reason why getting advice before applying can be useful.
What Happens if Your Income Has Gone Up or Down?
Lenders may look at income trends rather than relying on a single number. Suppose your business earned:
- Year 1: $70,000
- Year 2: $90,000
- Year 3: $120,000
That tells a different story from a business where income has fallen each year. The reason for the change can also matter. A temporary drop caused by a one-off event may be different from a continuing decline in business income. The lender may ask questions about what has changed and whether current income is sustainable.
What if You Have Recently Become Self-Employed?
Getting a home loan while self employed can be more difficult if you have only recently started your business because there may be less financial history available.
However, this does not automatically mean you cannot get a mortgage. The lender may consider the nature of your previous employment, the new business, your experience, contracts, income and other supporting information. A mortgage broker may help identify which lenders have criteria that could fit a newer self-employed applicant.
How Do Lenders Assess Affordability?
Income is only one part of a mortgage application. Lenders also need to understand your expenses and existing financial commitments.
Consumer Protection says lenders may consider income, accommodation costs, insurance, rates, existing debt repayments, living expenses and other regular outgoings when assessing whether borrowing is affordable. That means two people with the same business income could have very different borrowing positions.
For example, one applicant might have lower personal debt, fewer financial commitments, a stable business and strong savings. Another might have several loans, large credit card limits, higher household expenses and irregular business income. Their borrowing capacity may therefore be different.
Does the Reserve Bank Affect Self-Employed Mortgage Borrowing?
Yes, the wider lending environment can affect how much borrowers can obtain.
The Reserve Bank of New Zealand has a debt-to-income restriction framework that can place limits on certain high-DTI residential mortgage lending when the restrictions are activated. Banks also have their own lending policies and affordability assessments. The important point for self-employed borrowers is that there is no simple calculation based only on annual business turnover. Your overall financial position matters.
How Can a Mortgage Broker Help Self-Employed Borrowers?
A mortgage broker can help you understand how your income may be presented to potential lenders before you submit an application.
For a self-employed borrower, this can involve reviewing:
Business structure
How your company or sole trader setup affects the way income is assessed.Financial statements and personal income
Business profit, drawings, and how they combine to form your assessable income.Existing debts and household expenses
How your commitments affect overall affordability.Deposit, equity and credit history
Your starting position and how long you've been in business.
Capital Finance specifically says it works with self-employed borrowers and different lending situations. The goal is not to make the numbers look better than they are. It is to present an accurate picture of your finances and identify lending options whose criteria may suit your circumstances.
What Should You Prepare Before Applying?
If you are considering a self-employed mortgage, getting organised early can help. Prepare:
- Recent business financial statements
- Personal and business bank statements
- IRD information where required
- Details of all debts
- Details of regular household expenses
- Proof of deposit or available equity
- Identification
- Details of your business structure
- Information about current contracts or future income, if relevant
It can also help to speak with your accountant before applying if you are unsure how your accounts will be interpreted.
Need Help Understanding Your Self-Employed Income?
If you're unsure how a lender may view your business income, Capital Finance can review your circumstances and help you understand the lending options available through its panel of providers.
Capital Finance is an independent NZ mortgage brokerage that works with different borrower situations, including self-employed customers. Its team can help with the application process, documentation, and lender discussions while you focus on running your business.
Talk to Capital Finance about your self-employed mortgage options.
FAQ
Can self-employed people get a mortgage in NZ?
Yes. Self-employed borrowers can apply for home loans, although lenders may require more financial information than they would from a standard PAYE employee.
How do banks calculate self-employed income?
Banks may review financial statements, business profit, salary, drawings and other income sources. They also consider expenses, debts and the sustainability of the income. Each lender can have its own assessment method.
How long do I need to be self-employed before applying for a mortgage?
There is no single timeframe that applies to every lender. The requirements can depend on your business history, income, financial records, and overall application.
What documents do I need for a self-employed mortgage NZ?
You may need financial statements, tax or IRD information, bank statements, details of debts and evidence of income. Requirements vary between lenders.
Can I get a home loan if my business income changes every year?
Possibly. Lenders can assess variable income, but they may want to understand why income has changed and whether the current level is sustainable.
Can a self-employed mortgage broker help me?
A self-employed mortgage broker can help you understand how your income and business structure may be assessed and identify lenders whose criteria may suit your circumstances.
Can I get a home loan if I pay myself through drawings?
Possibly. The lender may look beyond the amount you draw from the business and examine the underlying business financials to understand the income available.
Is self-employed finance harder to get than a standard home loan?
It can require more documentation because business income is often more complex than a regular salary. However, being self-employed does not automatically prevent you from obtaining a mortgage.
