They say there are two certainties in life; death and taxes. Whilst we can’t avoid death, most of us want to avoid paying as much tax as possible – legally of course. We all know not declaring income is an offence, but the temptation of declaring less income to reduce tax can have repercussions when it comes to buying property.
Whether it be as an employee, a sole trader or a company, accepting cash payments to maximise your income and avoid tax will come back to bite you when applying for a home loan.
Why declaring all your income is important
Part of the home loan application process is to assess your ability to repay the loan. Unfortunately, lenders won’t take your word on how much money you have in your back pocket, so they want to see proof that you have sufficient income to repay the loan. That means, they will look at several things to assess that;
- Your individual tax return (if PAYG)
- Payslips (if PAYG)
- Your company tax return (if operating under an ABN)
- Your company accounts (if operating under an ABN)
- Salary credits into your personal bank account (if PAYG)
If your recorded income doesn’t support the ability to repay the home loan, then your application is at risk of being declined.
Show your history of income
If you’ve been declaring less income and then suddenly want to apply for a home loan, you can’t quickly change your income level just so you can show the lender that your income is more than what you had been declaring throughout the year.
Lenders will want to see that you’ve actually been receiving that level of income, so they’ll want a minimum of three months of your bank statements to show the credits into your account if your an employee. Most lenders require at least two years of your company accounts showing your income, however some lenders will accept one full financial year records. And, they’ll cross check everything – tax return lodgements, notice of assessment, company accounts and bank accounts.
In a region like the Central Coast where there is a large volume of tradies earning good money and property prices are still reasonable, planning for the future is key to getting into the market.
Low-doc home loans, an expensive alternative
For Central Coast buyers who haven’t declared all their business income, low-documentation (low-doc) home loans become the expensive alternative. Whilst tradies and business owners may have avoided paying some tax, the downside is a home loan that asks few financial questions, at much higher interest rates and fees. Low-doc home loans are only used when there is insufficient documentation to prove the ability to repay or savings history. Low-doc home loans interest rates are a minimum of 1% higher than the standard home loan, so the costs of buying and borrowing under these conditions can outweigh the benefit of stashing your cash.
Speak to a home loan broker
If you’re planning on buying in the near future and you’re unsure if your current income is sufficient, it’s best to speak with home loan broker Mint Equity first to identify your borrowing capacity.