If you happen to be a salary earner, proving your income is relatively easy. As long as your employer issues decent quality payslips, you can provide the 3 most recent slips and your income is locked in. Here’s a brief video about payslips. But if you are self-employed, income is a little harder to prove. Income can fluctuate from month to month and isn’t a good measure of your profit. You’ll need to provide the bank with your latest set of accounts; but how long after the end of financial year do you need to complete your accounts?
The traditional method is to provide a set of business financials prepared by a chartered accountant. This shows the business’ income and expenses. Whatever is left over is your profit and can be used towards your mortgage. There may be some other adjustments that can be made but your mortgage broker will calculate that for you.
At the time of writing, it’s the end of March 2022. You’re not generally required to submit your April 2021 – March 2022 financials to the IRD until March 2023 (a year from now), so there’s no hurry yet.
If you are looking for a mortgage at this time of year, the bank will consider assessing the previous year (April 2020 – March 2021) financials. But the income from those accounts is coming up to a year old so by the end of August 2022 they are going to want to start seeing the latest year. This is where self-employed people get caught out. You aren’t required to have your financials complete until March 2023 (through an appropriate accountant) but the bank will want to see them from August/September 2022.
One of the most common mistakes we see with business owners make is telling the bank the business’ gross income. This is the income before all expenses have been taken away and can’t be used by the bank.
As an example, a company might:
This would give them a profit of $70 which is the income they would enter in their mortgage application.
Often an accountant will enter some “home office” expenses for a business run from their home. In the example above, let’s say the $10 was actually for “home office rent and electricity”. In this case, the bank would allow us to add that back and the business would have made $80 profit.
Why? Because we must allow some personal expenses for anyone on the mortgage and this includes electricity. Having it in the business expenses and the personal expenses is taking it off your income twice.
Some typical business expenses that you may be able to add back are:
Let’s say your most recent year was an absolute goldmine. You could plausibly have your accounts done by mid-April (if you’re really on to it). Can you use these latest set of accounts to prove a much better income?
Absolutely! The bank would much prefer more recent information from your business so as soon as you’ve got your most recent financials, feel free to share them with your mortgage adviser.
If you are considering getting a mortgage between September this year and March next year, you will need to have your most recent set of accounts completed. You don’t have to submit them to the IRD but they must be signed off by your accountant as accurate. It would pay to get all the documents to your accountant as soon as possible to avoid a last minute rush. As a bonus, you will be providing your accountant with documentation much earlier than most of their clients. They will love you for that!
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