Avoid these 4 mistakes with self-employed home loans

Income verification catches most self-employed solicitors off guard

Lenders assess self-employed borrowers differently to salaried employees. If you operate through a trust, partnership, or your own practice, your income is calculated from tax returns and financial statements rather than PAYG summaries. Most lenders require two full years of financials, though some will accept one year if your circumstances support it.

Consider a solicitor who left a firm mid-year to establish her own practice. Her first financial year showed $180,000 in profit after expenses, but the lender averaged her income across both the previous salaried year and the new self-employed year. The result was a serviceability calculation lower than her current earning capacity. She needed to wait until a second full year of self-employed income was lodged before the lender would use the higher figure.

Addbacks matter. Depreciation, one-off equipment purchases, and some discretionary superannuation contributions can be added back to your taxable income when calculating serviceability. Lenders vary in what they allow. One lender may add back $15,000 in depreciation and accept a higher borrowing figure. Another may exclude it. Knowing which lender treats your structure most favourably changes the outcome.

Timing your application around your tax return lodgement

Lodge your tax return before applying if your most recent financial year shows stronger income than the prior year. Lenders require tax returns and financial statements, and the most recent lodged return is what they use. If you lodge a return in October showing higher profit than the previous year, the lender can use that figure immediately. If you apply in August before lodging, they use the older, lower figure.

In our experience, solicitors who time their application to follow a strong financial year gain access to a higher loan amount without waiting another 12 months. One barrister delayed his application by six weeks to allow his accountant to lodge a return showing $240,000 in assessable income, up from $195,000 the prior year. The difference in serviceability was $110,000 in borrowing capacity.

If your income has dropped in the most recent year due to planned leave, a change in practice area, or reduced hours, consider waiting to apply until the next financial year if your circumstances allow. Lenders average the two most recent years in most cases, so one lower year reduces the calculation even if your current income has recovered.

Structure of ownership affects LVR and LMI treatment

If you purchase in your personal name but your income flows through a trust or company, some lenders treat the application as higher risk. Lenders assess risk based on the alignment between the income source and the borrowing entity. Where the trust is the applicant and you act as guarantor, different serviceability rules apply. Where you are the applicant and the trust distributes income to you, the lender reviews trust deeds, distribution minutes, and beneficiary entitlements.

LMI providers apply different risk weights to self-employed borrowers. At an LVR above 80 per cent, one insurer may accept your application with standard premiums while another declines or loads the premium. Solicitors often qualify for LMI waivers with certain lenders, which removes the need for insurance even at higher LVRs. If you are self-employed and borrowing above 80 per cent, check whether your profession-based waiver still applies. Some lenders restrict waivers to salaried employees only.

Offsetting business and personal cash flow in serviceability

Lenders assess your ability to service a loan by applying a buffer of at least 3.0 percentage points above the loan product rate. If you draw income from a business or trust, they also consider whether that income is stable and recurring. A distribution of $200,000 in one year followed by $120,000 the next year will be averaged or discounted depending on the lender's policy.

Business expenses that reduce your taxable income also reduce your serviceability. If you salary sacrifice superannuation, claim home office deductions, or write off capital purchases, those deductions lower the income figure the lender uses. One solicitor reduced his taxable income to $140,000 through legitimate deductions but needed to borrow based on a higher figure. His accountant prepared a serviceability letter showing addbacks of $28,000, which two lenders accepted. The third lender did not, and declined the application.

If you operate your practice through a company and take a mix of salary and dividends, some lenders will assess only the salary component unless the dividend history is consistent over two years. Franking credits are not added back. If you rely on dividends for a significant portion of your income, confirm the lender's treatment before proceeding with pre-approval.

Documentation requirements extend beyond standard applications

Self-employed applicants provide tax returns, financial statements, and ATO portal evidence. You will also need a letter from your accountant confirming your ongoing role in the business, and in some cases, evidence of business continuity such as a client retainer summary or practice insurance renewal. If you have recently transitioned from employment to self-employment, lenders may ask for a business plan or evidence of recurring revenue.

If your income is derived from multiple sources such as a legal practice, property income, and consulting work, each source is assessed separately. Rental income is typically calculated at 80 per cent of the gross rent to account for vacancy and maintenance. Consulting income may be averaged or discounted if it is irregular. The lender builds a composite picture, and the way you present the information affects the outcome. Providing a cover letter that summarises your income structure, supported by clear financials, reduces the time to assessment and the risk of decline.

Solicitors operating through self-employed structures have access to the same loan products as salaried employees, including offset accounts, split loans, and interest-only terms for investment lending. The difference lies in how income is verified and the lender's appetite for your particular structure. Choosing a lender that understands legal practice ownership and trust distributions improves your chance of approval at the rate and LVR you need.

Call one of our team or book an appointment at a time that works for you.

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