Borrowing Capacity: What Self Employed Lenders Look For

How Lenders Calculate Borrowing Capacity When You're Self Employed

Lenders assess your borrowing capacity by looking at your net profit after tax and add-backs, not your turnover. They take that adjusted income figure, apply living expenses benchmarks, subtract your existing debts, and test it against an interest rate buffer of 3.0 percentage points above the product rate. The result is what you can borrow without breaching their serviceability limits.

Consider a contractor with $140,000 in taxable income after legitimate business deductions. If they're claiming $18,000 in vehicle depreciation each year and the lender accepts that as a non-cash add-back, the servicing income becomes $158,000. With $6,000 in monthly living expenses for a family and no other debts, that translates to roughly $750,000 in borrowing capacity at current variable rates. Strip the add-backs and the capacity drops to around $640,000. The difference between those two figures is whether the lender understands self employed income structure or treats it like PAYG.

Most lenders require two full years of lodged tax returns and two years of financials. A handful will consider 12 months of strong trading history if your ABN is older. Newly self employed borrowers with less than a year of lodged returns can sometimes access low doc products that rely on accountant declarations and bank statements, though those loans typically come with slightly higher rates and a lower maximum loan-to-value ratio.

The Add-Backs That Lift Your Servicing Income

Add-backs are non-cash expenses that reduce your taxable income but don't affect your ability to service a loan. Depreciation on equipment, vehicles and property fit-out is the most common. One-off business expenses like franchise purchase costs or software licences also qualify if they're non-recurring. Some lenders will add back a portion of your superannuation contributions if you're making voluntary payments above the statutory minimum.

A sole trader running a digital marketing consultancy might show $95,000 in net profit after claiming $12,000 in equipment depreciation and $8,000 in home office deductions. If the lender accepts both as add-backs, the servicing income becomes $115,000. That $20,000 difference can lift borrowing capacity by $90,000 to $100,000 depending on your other commitments. Not every lender will accept every add-back, and some cap the total adjustment at 10 or 15 per cent of declared income.

Lenders typically average your last two years of income, though some weight the most recent year more heavily if it's higher. If your income dropped between years, expect them to use the lower figure or apply a conservative averaging method. A builder who declared $180,000 two years ago and $140,000 last year will likely be assessed on $140,000 to $160,000 depending on the lender's policy and whether there's a plausible explanation for the drop.

If the decline is temporary and tied to a specific event like taking three months off for a renovation or losing a major contract that's since been replaced, your broker can support the application with a letter from your accountant explaining the context. Lenders want to see stability or growth. A consistent downward trend over multiple years will either reduce capacity or trigger a decline unless there's a clear turnaround in recent trading.

Company and Trust Structures Versus Sole Traders

If you operate through a company, lenders assess your income based on the salary and dividends you draw, not the company's retained profit. A director taking $80,000 in salary and $40,000 in franked dividends will be assessed on $120,000, assuming those dividends are consistent across two years. Retained profit sitting in the company won't count unless you can demonstrate a pattern of distribution.

Trust structures add another layer. If you're a beneficiary of a discretionary trust, lenders will look at the distributions declared in your personal tax returns. If distributions vary wildly year to year, they'll take the lower figure or average conservatively. Company directors and trustees often have lower servicing income on paper than sole traders with the same business turnover, purely because of how income is allocated for tax purposes. Your self employed mortgage broker can model this before you apply and recommend whether it's worth adjusting your distribution strategy ahead of lodging returns.

Debt-to-Income Limits and How They Intersect With Serviceability

From 1 February 2026, lenders can only write 20 per cent of new owner-occupier loans and 20 per cent of new investor loans to borrowers with a debt-to-income ratio of six times or greater. If you're borrowing $900,000 and your assessable income is $140,000, your DTI is 6.4. That puts you in the restricted portion of the lender's portfolio, which means approval depends on whether they've already hit their quarterly cap.

In practice, most self employed borrowers sit between 4 and 6 times income. If you're pushing above 6, your broker will either steer you to a lender with capacity left in that bucket or look at reducing the loan amount by increasing your deposit. Non-bank lenders aren't subject to the DTI cap, which gives them more flexibility at the higher end of the range, though their rates are typically 0.3 to 0.6 per cent above the majors.

Using Offset Accounts and Genuine Savings to Strengthen Your Position

Lenders assess genuine savings as part of your overall financial position. If you've held 5 per cent of the purchase price in your own accounts for at least three months, it demonstrates financial discipline and reduces perceived risk. Funds that appear suddenly, such as a large deposit from a family member or a single business transfer, won't count as genuine savings unless they've been held and seasoned.

An offset account linked to your loan doesn't directly increase your borrowing capacity, but it does reduce the interest you pay and improves cash flow. If you're carrying $50,000 in your offset against a $600,000 loan, you're only paying interest on $550,000. That frees up monthly cash flow, which can be redirected into building further savings or servicing other commitments. Lenders won't credit the offset balance as income, but they will see it as evidence of sound financial management.

What Happens When You Have Multiple Income Sources

If you run two businesses or combine self employed income with rental income or a part-time PAYG role, lenders will assess each income stream separately and apply their own shading. Rental income is typically discounted by 20 to 30 per cent to account for vacancy, maintenance and management costs. PAYG income from a casual or part-time role will be included at full value if you've been in the role for at least six months and can provide payslips.

A freelancer earning $90,000 from consulting and another $15,000 from a part-time teaching role will be assessed on the full $105,000, assuming the teaching contract is ongoing. If that same freelancer also owns an investment property generating $25,000 in annual rent, the lender will typically add $17,500 to $20,000 to the servicing income after applying their discount. Multiple income streams improve your overall position, but only if each one is stable and verifiable.

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Important information: This article provides general information only and does not take into account your individual financial circumstances, needs or objectives. All figures, calculations and scenarios are illustrative only and do not represent a quote, offer of finance or guarantee of borrowing capacity or loan approval. Actual outcomes vary according to your circumstances, supporting documentation and the lender’s policies, assessment methods and eligibility criteria. Interest rates, lending policies and product availability are subject to change. A comprehensive assessment of your financial position, requirements and objectives is required before suitable lending options and an indicative borrowing capacity can be determined. All applications remain subject to the lender’s assessment and approval.