Navigating Mortgage Options for Directors with Irregular Income in Australia

Securing mortgage finance can be a challenging endeavour for directors and business owners in Australia, particularly for those with irregular or fluctuating incomes. Unlike salaried employees with stable monthly incomes, directors often derive income from dividends, profit shares, or varying business performance – making traditional mortgage assessments more complex. Fortunately, a range of specialized mortgage products now exist to help directors overcome these hurdles and access the finance they need.

Here’s what you need to know.

1. The Challenge of Irregular Income

Directors, particularly those running SMEs, often experience income variability due to the cyclical nature of business profits, which can lead to peaks and troughs throughout the year. Conventional mortgage lenders, however, prioritize regular, salaried income and may view these patterns as higher risk, limiting lending options or offering reduced loan amounts. This often results in directors and business owners struggling to find mortgage products that accurately reflect their financial standing.

Tips & Tricks: Where possible, have any salary component that is being drawn as a Director paid on a regular basis (i.e. fortnightly / monthly) as opposed to large, ad-hoc lump sums during the financial year. This will be looked at more favourably at the time of mortgage assessment.

2. Using Historical Financial Performance

When calculating the maximum borrowing capacity for directors and business owners, banks will look at past financial years when calculating affordability. This can be advantageous, if the last one or two financial years are more profitable than the current year, or a disadvantage where the past financial years performance is lower than current.

There are differing approaches across the banks when it comes it:

1. The number of financial years needed. The most recent or the two most recent years.
2. The ability to use one years’ financial performance in isolation. As opposed to averaging performance over two years or taking the lower of the last two financial years.
3. The ability to use forecasted/projected financial performance.
4. When a particular financial year becomes “invalid” or “expired”. Some banks will accept a financial year’s performance until 31 December that year, or 01 May the following year.

Tips & Tricks: It can make a material difference on choosing which banks to approach based on what documents they need, within what time period, and through which lens they assess the financial performance.

3. Alternative Documentation Solutions

To better accommodate directors, some lenders provide mortgage products that accept alternative forms of income verification, including:

• Accountant Letters: Lenders may accept a letter from the director’s accountant verifying their income based on a history of earnings, making it easier to satisfy mortgage requirements.
• Business Activity Statements (BAS): Monthly or quarterly BAS documents can showcase ongoing business revenue and provide insight into cash flow stability.
• Low Documentation Loans (“Low Doc” Loans): These loans allow directors to self-certify their income, supported by limited documentation, often in the form of BAS or bank statements, and with the confirmation of an accountant. While these loans typically come with slightly higher interest rates, they offer a practical solution for directors with fluctuating income.

These finance solutions are useful where the Director is part of a fast growing business, or current financial tax affairs are not quite up to date and ready to be presented to a bank at the time of application.

Tips & Tricks: Alternative Document loans are more expensive however are never a long term solution. Directors and SMEs may use this solution to get into the market now, with the intention to refinance this loan to a standard document loan at the appropriate period.

In summary, Irregular income can be a challenge for directors or business owners seeking finance but there are specific lending policies and loan products that cater for this scenario and it pays to understand your options in detail.

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