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 Financials for the business. 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 Adviser will calculate that for you.
At the time of writing, it’s April 2020. You’re not generally required to submit your April 2019 – March 2020 Financials to the IRD until March 2021 (almost a year from now). In fact, the financial year has only just finished so there’s no hurry yet.
If you are looking for a mortgage at this time of year, the bank will consider that using the previous year (April 2018 – March 2019) financials as appropriate. But the income from those accounts is coming up to a year old so by the end of August 2020 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 2021 (through an appropriate Accountant) but the bank wants to see them from August / September 2020.
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 a personal 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 is an absolute skyrocket. 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 Adviser.
It's very early to tell how the banks will treat this. My suggestion is that if you suffered a significant loss of income in March due to the Covid-19 outbreak, that you show the banks a breakdown of your Profit and Loss by month. Show them that, until January or February 2020, your income was steady and healthy but March was unusually quiet. The next requirement will be to prove that after March/April, income returned to normal.
Our best guess is that, if you can show the lockdown meant a one-off drop in profit, the banks may consider taking 11 months of your income (April 2019 - February 2020) and annualising the profit.
If you are considering getting a mortgage between September and March, 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!
Think you've got your Accounts sorted? Here's a blog on deposit for your first home.
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