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Self-employment offers flexibility, independence, and potentially unlimited earning potential, but it creates unique challenges when refinancing your mortgage. While employed borrowers can prove income with recent pay slips, self-employed individuals face more complex documentation requirements and greater lender scrutiny. Lenders view self-employed income as less stable and reliable than employment income, requiring more extensive proof that your business generates sustainable income supporting mortgage obligations.
This comprehensive guide explains why self-employed refinancing is more challenging, details exactly what documentation lenders require from self-employed borrowers, provides strategies for successfully refinancing as a business owner, explores how different business structures affect refinancing, and helps you maximize your chances of approval despite self-employment complexities.
Why Self-Employment Complicates Refinancing
Understanding lender perspectives helps you navigate the refinancing process more effectively.
Lender Concerns About Self-Employment
Lenders view self-employed borrowers as higher risk for several reasons. Business income is inherently more variable than employment income—you might have excellent years followed by difficult periods. Self-employed individuals can't be "made redundant" in the traditional sense, but entire businesses can fail, eliminating income entirely.
Income documentation is more complex and easier to manipulate than employment documentation. Pay slips from employers are relatively straightforward to verify, while business financial statements involve more interpretation and potential for creative accounting. Self-employed borrowers might structure their affairs to minimize tax, creating low official income that doesn't reflect actual available cash flow.
These concerns mean lenders apply stricter requirements to self-employed applications, requiring more documentation and often taking more conservative views of income levels.
The Two-Year Rule
Most New Zealand lenders require at least two full years of self-employment history before they'll approve mortgage applications. This requirement reflects lenders' need for evidence that your business is viable and generates consistent income rather than being a temporary venture that might fail.
If you've been self-employed for less than two years, refinancing is extremely difficult regardless of how successful your business is or how much you're earning. You typically must wait until you have two full years of financial statements and tax returns before lenders will consider applications.
Some lenders make exceptions for professionals—doctors, lawyers, accountants—who transition from employment to self-employed practice in the same field, particularly if taking over established practices with proven income. However, these exceptions are uncommon and require very strong documentation.
Income Assessment Differences
Lenders assess self-employed income more conservatively than employment income. They analyze your financial statements to determine sustainable income, often averaging the last two years and using the lower year if there's significant variation. They add back non-cash expenses like depreciation but deduct one-time income items that aren't repeatable.
The result is "assessed income" that often differs substantially from what you consider your actual earnings. If your business made eighty thousand dollars profit last year but included a one-time sale of equipment and you took significant depreciation, lenders might assess your income at only sixty thousand dollars.
This conservative assessment means you might not qualify for as much borrowing as you expect based on your actual business earnings.
Essential Documentation for Self-Employed Refinancing
Gathering comprehensive documentation is crucial for successful self-employed refinancing.
Financial Statements and Tax Returns
The foundation of self-employed applications is financial statements for the last two years prepared by a registered accountant, including profit and loss statements, balance sheets, and cash flow statements. Personal income tax returns for the last two years with IRD notices of assessment confirming you've filed and paid required taxes are essential.
If you're GST registered, provide GST returns for the last year demonstrating business activity and revenue. Business tax returns if you operate through a company or partnership, including company financial statements and tax returns, are also required.
Lenders want these documents prepared by qualified accountants rather than self-prepared statements, as professional preparation provides assurance of accuracy and adherence to accounting standards.
Bank Statements
Provide personal and business bank statements covering at least six months, ideally twelve months. Lenders review these to verify cash flow through your business matches financial statement representations, confirm income deposits align with reported revenue, and check for concerning patterns like frequent overdrafts or dishonored payments.
Ensure your bank statements present well by maintaining clear separation between business and personal finances, avoiding frequent overdrafts that suggest cash flow stress, and ensuring business income and expenses are appropriately documented.
Accountant Letters
A letter from your accountant is valuable supporting documentation. The letter should confirm your business financial position and income, explain any unusual items in financial statements that might concern lenders, and verify that financial statements accurately represent your business performance.
Strong accountant letters address potential lender concerns proactively, demonstrating professionalism and improving application credibility.
Business Contracts and Forward Orders
Evidence of ongoing business and future income strengthens applications. Provide existing contracts for work extending into the future, letters from clients or customers confirming ongoing relationships, industry registrations or licenses proving you can legally operate, and any other documentation showing your business has established market presence and likely continued income.
This forward-looking documentation helps lenders feel confident your past income will continue rather than being one-time success unlikely to repeat.
Proof of Business Ownership
Lenders need evidence you actually own and control the business whose income you're claiming. Provide business registration documents from Companies Office if incorporated, partnership agreements if operating as partnership, and any other documentation proving ownership and control.
If you're a minority shareholder or partner, lenders might only count your proportionate share of business income rather than the full amount.
Maximizing Income Assessment
Self-employed borrowers can take steps to maximize how lenders assess their income.
Structuring Financial Statements Appropriately
Work with your accountant to ensure financial statements present your income favorably while remaining accurate. Clearly separate business expenses from personal expenses—don't run excessive personal costs through your business reducing reported income. Document add-backs like depreciation and non-cash expenses that lenders should add back to income.
If you've had unusual one-time expenses that reduced a particular year's profit, provide clear explanations so lenders understand your normal income is higher. Ensure statements use standard accounting formats that lenders recognize rather than non-standard presentations requiring interpretation.
Demonstrating Income Consistency
Lenders favor consistent income over highly variable income even if average income is similar. If your business has seasonal patterns, provide explanations so lenders understand variation is normal rather than indicating instability.
If you've experienced income growth over the last two years, highlight this positive trajectory demonstrating your business is strengthening rather than struggling. Growing businesses often receive more favorable income assessments than stagnant or declining businesses.
Minimizing Tax Optimization That Reduces Assessable Income
Many self-employed individuals legitimately minimize tax through various strategies, but extreme tax minimization can reduce your assessable income to levels that don't support mortgage applications. If you're planning to refinance, consult with your accountant about balancing tax optimization against mortgage application needs.
Sometimes accepting slightly higher tax obligations to report higher income is worthwhile if it allows you to refinance at better rates or access needed equity. Model scenarios comparing tax savings from aggressive minimization against borrowing limitations it creates.
Showing Stable or Growing Business Equity
Lenders review your business balance sheets to assess overall business health. Increasing equity in your business year-over-year demonstrates profitability and stability. Declining equity or increasing debt might concern lenders about business viability.
If your business balance sheet shows concerning trends, provide explanations of circumstances and steps you're taking to improve financial position.
Different Business Structures and Refinancing
How you structure your business affects refinancing complexity and lender assessment.
Sole Traders
Sole traders are the simplest structure for refinancing purposes. Your business income is your personal income reported on personal tax returns. Lenders assess your individual tax returns and personal financial position.
Documentation is relatively straightforward compared to more complex structures, though you still need proper financial statements and all standard self-employment documentation.
Partnerships
Partnerships require partnership tax returns and financial statements plus your individual tax returns showing your share of partnership income. Lenders want partnership agreements documenting your ownership percentage and income entitlement.
They typically only count your proportionate share of partnership income rather than the full partnership income, so if you own thirty percent of a partnership, only thirty percent of partnership profit counts toward your income.
Companies
Operating through a company separates business and personal finances more completely but complicates refinancing. Lenders need company financial statements and tax returns plus documentation showing how you extract income from the company through salary, shareholder salary, or dividends.
They assess your actual personal income drawn from the company rather than company profits sitting in the company that you're not personally accessing. If your company made one hundred thousand dollars but you only took forty thousand in salary, lenders assess your income at forty thousand, not one hundred thousand.
Consider whether your income extraction from your company adequately demonstrates your personal income capacity or whether adjusting your salary structure before refinancing would improve your assessed income.
Trusts
If you operate through trusts, documentation becomes complex. Provide trust deeds, financial statements, and evidence of distributions you've received. Lenders scrutinize trust structures carefully as they can obscure true income and asset positions.
Some lenders are uncomfortable with complex trust arrangements and prefer simpler structures. Discuss your trust structure with potential lenders or brokers before applying to ensure they're willing to work with your arrangements.
Strategies for Successful Self-Employed Refinancing
Several approaches improve your chances of successful refinancing as a self-employed borrower.
Timing Your Application Strategically
Apply to refinance after completing your best financial years rather than following difficult periods. If your business just had an excellent year with strong profits, waiting for that year's financials and tax returns to be completed before applying strengthens your application substantially.
If your business experienced a down year recently, consider whether waiting another year to show recovery improves your position. Lenders averaging two years of income are more favorable to applications where recent years are strong rather than weak.
Maintaining Lower LVR
Self-employed borrowers often succeed more easily when maintaining lower loan-to-value ratios. If you have significant equity—say thirty to forty percent rather than minimum twenty percent—lenders are more comfortable with self-employment income uncertainty because their security position is stronger.
If possible, pay down your mortgage before refinancing to create more equity, or accept refinancing for less than maximum available borrowing to maintain comfortable equity positions.
Using Mortgage Brokers with Self-Employment Experience
Not all mortgage brokers have extensive self-employment lending experience. Seek brokers who specialize in or regularly handle self-employed borrowers, as they understand which lenders are most flexible with self-employed income and how to present applications to maximize approval chances.
Experienced brokers know how to explain complex business structures to lenders, what supporting documentation strengthens applications, and which lenders to approach for different self-employment situations.
Strengthening Other Application Aspects
While you can't change your self-employment status, you can strengthen other aspects of applications. Ensure you have excellent credit history with no defaults or late payments, maintain healthy savings and assets beyond your business, keep debt levels low on credit cards and other facilities, and provide comprehensive explanations of your business and income sources.
Strong compensating factors can offset lender concerns about self-employment income variability.
Preparing Comprehensive Explanations
Self-employed applications benefit from detailed written explanations of your business, income sources, and financial position. Describe what your business does and your role, explain your typical income patterns and any seasonal variations, document how you've maintained income through economic cycles, and outline your business plans and prospects for continued income.
Well-prepared explanations demonstrate professionalism and help lenders understand your situation rather than just reviewing numbers without context.
Common Self-Employment Refinancing Challenges
Anticipating challenges helps you address them proactively.
Variable Income Years
If your income varies significantly year-to-year, lenders typically use conservative assessments based on lower years. If you earned eighty thousand dollars one year but only fifty thousand the next, lenders might assess your income at fifty thousand or perhaps sixty-five thousand (averaging but weighted toward lower amount).
Address this by providing explanations of why income varied, evidence that lower years resulted from unusual circumstances rather than business decline, and documentation suggesting future income will align with higher years rather than lower years.
Recent Business Start
If you've been self-employed for exactly two years or just slightly over, you're at minimum acceptable timeframe for most lenders. Some lenders prefer three or more years of history. If you're just over the two-year threshold, emphasize any prior relevant industry experience demonstrating your business isn't completely new and that you have established expertise in your field.
Providing evidence that despite being a recent business, you have strong client relationships and ongoing work can help compensate for limited history.
Complex Business Structures
Multiple business entities, complex trust arrangements, or international business components create assessment difficulties. Lenders struggle to understand convoluted structures and often decline applications rather than spending excessive time untangling complexity.
If your business structure is complex, consider whether simplification is possible before refinancing. Alternatively, ensure you provide exceptionally clear documentation and explanations helping lenders understand your arrangements without confusion.
Industry-Specific Concerns
Some industries face particular lender skepticism. Building and construction businesses, for example, are viewed as higher risk due to industry volatility and potential for failures. Hospitality businesses face concerns about competition and failure rates.
If you're in an industry lenders view skeptically, emphasize your specific business strengths, your personal experience and qualifications, and evidence that your business is well-established and stable despite broader industry challenges.
When Self-Employment Creates Insurmountable Barriers
Sometimes self-employment genuinely prevents refinancing, at least temporarily.
Insufficient Time Self-Employed
If you've been self-employed for less than two years, refinancing is virtually impossible with mainstream or even second-tier lenders. Your options are waiting until you meet the two-year requirement or potentially using specialist lenders with extremely high rates if refinancing is absolutely urgent.
Generally, waiting is vastly superior financially. Several months or a year of higher interest on your current mortgage costs far less than years at specialist lender rates.
Declining Business Performance
If your business financials show declining income, increasing debts, or other signs of distress, lenders won't approve refinancing regardless of documentation quality. In these situations, focus on stabilizing your business before attempting to refinance.
If business difficulties threaten your ability to make current mortgage payments, discuss hardship options with your existing lender rather than trying to refinance elsewhere.
Insufficient Income for Serviceability
Sometimes assessed income simply isn't high enough to support required borrowing. If lenders assess your income at fifty thousand dollars but that won't service your existing mortgage plus other debts, refinancing isn't possible until your income increases or you reduce debts.
Calculate serviceability realistically before applying so you're not surprised by declines. Work with brokers or use online calculators to understand minimum income needed for your refinancing requirements.
Professional Support for Self-Employed Refinancing
Given the additional complexity, professional support is particularly valuable for self-employed refinancing.
At Luminate Financial Group, we specialize in helping self-employed New Zealanders successfully refinance by understanding which lenders are most flexible with different types of self-employment income, knowing how to present financial statements and business structures to maximize income assessment, coordinating with your accountant to ensure documentation supports your application optimally, and providing realistic assessments of whether refinancing is currently achievable or if waiting would improve outcomes.
We've successfully refinanced hundreds of self-employed borrowers across diverse industries and business structures. Our experience means we understand the nuances of self-employment lending and can position applications for maximum success.
We also provide honest feedback when refinancing isn't currently viable, helping you understand what needs to improve and when you should realistically attempt refinancing.
Self-employed and need to refinance your mortgage? Contact Luminate Financial Group for specialist guidance. We understand self-employment lending complexities and will help you navigate the refinancing process successfully or advise when waiting would serve you better.
