When an employee applies for a mortgage or any other loan product, banks or non-bank companies look at his income from the employer. The whole process is relatively simple and straightforward.
However, it is no longer so easy for self-employed persons, because the income of a self-employed person proves to be more complicated, or self-employed persons may encounter several obstacles when proving it.
Assessment of income of self – employed persons
For self-employed persons, banks assess their ability to repay in one of two ways:
- according to net income,
- according to turnover.
Each of these methods has its advantages and disadvantages for individual tradesmen. Therefore, it is important that each self-employed person chooses a bank using a method that is more advantageous in his particular situation when applying for a mortgage.
Assessment by net income
In the first option of assessing the ability to repay, the bank looks at the net income of the self-employed person. The tax return is used as a source of information, and often only the tax return for the last year is not sufficient and longer-term income needs to be proven.
The bank deducts from the turnover of the self-employed person the costs of business (either real or lump sum), paid contributions, and paid tax. Based on this, the annual net income of the self-employed person is calculated, which is still divided by the number of months.
Assessment by turnover
Many self-employed people try to optimize their net income to pay the lowest possible taxes. For such entrepreneurs, the assessment of net income is very disadvantageous, because they have it low due to tax optimization. For such self-employed persons, it is often more advantageous to assess the income according to their turnover.
When assessing GFIC’s income according to turnover, only gross income is taken into account. There is no emphasis on the actual net income from the trade. In this case, the banks assume that the self-employed person’s net income is approximately at the level of 10% of his total turnover. Of course, this number may vary from bank to bank.
A problem for new traders
The last 6 to 12 months are taken into account when assessing the income of employees. For self-employed persons, even 12 months is often not enough and it is necessary to prove income in the last 2 or 3 years.
This can cause further complications for new traders, who may have to wait a few years for their mortgage. Fortunately, there are several exceptions (such as for members of the Medical Chamber, the Legal Chamber, and other chambers).
Of course, if the self-employed person already has some loans, credits, or leases, their monthly payments will be deducted from real or calculated net income when assessing the ability to repay the mortgage.
Which option is the most advantageous?
It cannot be said that any of the above options would generally be more advantageous. It all depends on your situation:
- Assessing income according to trade turnover is especially advantageous for people who also focus on tax optimization in their business and have low net income.
- On the other hand, the assessment according to net income is advantageous for self-employed persons who do not focus on tax optimization or have a low turnover, on the basis of which they would not receive a mortgage.
It is also important to take into account the offer of individual banks, as they may proceed differently to assess the income of self-employed persons. You can use our mortgage comparator to find the most advantageous mortgage.