Ian Whitworth on the home loan traps business owners should know about
It’s important to show that no matter how comfortable you are, the bank system is set up to punish business owners at every turn.
For the last month I’ve been in the deepest circles of bank finance hell after buying a place up the coast, and I’ve learned a lot.
I know this story will be of no interest to many readers, but of massive interest to the ones who run their own business and wonder how they’ll ever own a home. And let’s face it, most once-proud news mastheads are now mostly real estate clickbait so I may as well join in the fun.
So this week, a comfortably well-off business guy battling to get a home loan that most of our staff would have qualified for.
It’s a tale of the endless finance grind you face if you own a business.
The blue fibro
I hadn’t bought a house in a long time, so I was well out of practice. The opportunity came up for a modest fibro place in a pleasant coastal village: north enough for warm water, south enough for locals that believe in vaccines.
It’s bright blue and feels like the long, simple summers of childhood.
The backyard has an asbestos drinking shed you could picture Bob Hawke in. Wearing only thongs and budgie-smugglers, sculling a schooner of Resch’s Pilsner after a heroic yard cricket innings.
No plans to move out of Sydney, just an escape option for breaks and future pandemics.
Finance should be pretty straightforward, I thought. I’ve got the steady income, the assets, the established track record.
Wrong, monkey boy.
The finance back-story
I feel a bit weird writing this section, because finance is personal and it’s hard to write about without seeming like a wanker. But it’s important to show that no matter how comfortable you are, the bank system is set up to punish business owners at every turn.
I have years of tax returns, personal and business, to show I can cover the loan I need easily. If interest rates go 5% higher, I’ve got it.
My credit record is spotless. I’ve paid off entire houses. Our businesses have super-conservative, almost debt-free balance sheets.
I’ve always paid my credit card off in full by the due date, as my parents told me to do when I left home.
I’m a model of creditworthiness. In my own mind.
These applications should be a mere formality
I was bugged by the invasive detail of the current application forms — “how much do you spend monthly on snack food?”— but I figured it was new government regulation so just deal with it.
I put in two applications: to a major bank, and a looser mortgage brand.
Loose Mortgage Brand Guy, who I’d borrowed from before, said it would be no problem at all mate.
I gave them what they asked for: the epic forms filled out, plus two years of personal and business tax returns.
The next three weeks were a relentless grind of demands for more and more documents. It was like a forensic tax audit.
I didn’t get formal approval from Big Bank until 10pm the night before the auction, by which time I was a seething ball of stress. It was a line-ball call on their part.
Meanwhile Loose Mortgage Brand Guy called me in an ashamed tone and said:
“I’m so sorry, the assessor can’t approve your loan under our current rules. I know you’re good for it, and so does the assessor, but if he approves it, the auditor will fire him. it wouldn’t have been a problem under last year’s rules, I’m so embarrassed.”
It stings to be turned down for a mortgage when you think that stuff is all behind you.
The business owner finance trap
Want a house loan? You’re in a complex trap if you own a business.
The approval process is a rigid box-ticking system, designed to stop your nice friend in the bank making subjective calls because they know you’re good for the money.
Here’s how it works: all the bad, risky things about your situation are exaggerated to an intergalactic level. And most of the good things are discounted to zero.
If you have a credit card limit of $25,000 they count that as a $25,000 debt.
“But I always pay it off. As you can see from decades of statements because I’m with your bank.”
“Sorry, we have to assume you might go rogue.”
This was how the leases got me, on a much grander scale.
The lease backstory
Everyone who doesn’t own a business thinks you can just borrow money to grow it. Ha. You can, if you’re a public company.
Everyone else: no money for you unless you’re borrowing against your house, or property the business owns.
That’s how our business started, and we grew it to a decent size financed by earnings. But you get sick of everything being tied back to your house.
So when another big bank offered us a pre-approved lease facility three years ago, the debt secured against the assets rather than our houses, we jumped at it.
We didn’t plan to use it all, but it was handy in case we had unexpected growth opportunities.
We sat back in the leather chairs in the top-floor boardroom in their city office while they stroked our egos.
“You guys have built an amazing business, great cash flows. We can give you as much credit as you like. Is $5 million enough? Have more if you like.”
Basking in this overdue recognition, we signed up for the $5 million pre-approval. After all, we would only pay for what we use.
At last we’d joined the finance high rollers club.
We ended up using about $2 million for some projects, which is currently half paid off.
Guess how the home mortgage assessor views that?
Yep: that’s the full $5 million in my personal debt column, even though my business partners share that purely theoretical debt.
What the actual fuck.
I asked the mortgage guy what debt number would be acceptable, in case I wanted to get the lease limit lowered. Of course, they’re not allowed to tell you.
Your cash is worth nothing
“Okay,” I said, trying to mount a case.
“Let’s assume we did turn into imprudent debt maniacs and borrow the full $5 million. We could still cover those payments from the business cash flows, plus we have these cash reserves, with your bank, that we’ve been saving for a rainy day.”
I sent them the current statements.
“Sorry, we can’t factor cash in. Because you could withdraw it and spend it at any time.”
So it counts as zero in the tick-a-box game.
You can provide decades of evidence of sensible business management, and the bank system will assume you are a borderline fraudster with chronic substance-abuse and gambling issues.
It’s really annoying to know if I earned half as much on an employee salary, I would have got easy approval.
For bonus annoyance, there were a couple of issues where I’d read there were exemptions to the rules.
“Yes, you could be exempt from those fees,” they said. “Are you a doctor, accountant or lawyer?”
What 1960s time machine had I stepped into?
If you want bank respect, you must choose a career that your mum would have wanted for you.
This isn’t a customer service rant by the way; everyone in the whole process was really pleasant and helpful. And also constrained by a system stacked in favour of salaryfolk.
(I’m conscious that my complaints come from a position of rich guy privilege. And an insatiable need for blog topics. But this isn’t just a problem for business owners, it’s even more of a problem for an entire generation of employees on rolling annual contracts or worse, gig economy work. This generational inequality is a massive long-term problem for our society but when Scott Cam is our God, we seem to be stuck with it.)
Business-owner mortgage tips
So here are some risk-reduction tips if you ever want to own a house, small biz people.
- Say no to those automatic credit card limit increases they offer, each one makes it worse for you. This applies to everyone, not just business owners.
- Likewise for leases. Use what you need but don’t get pre-approved ceilings ‘just in case’.
- The banks now have AI that scans your credit card statements for expense categories that are a red flag for people with no finance discipline. Looking at you, UberEats. Cut back before you apply for a loan. Google ‘algorithmic credit scoring’ for more on the unappealing, discriminatory future of home loans.
- If you can, ‘manage’ your revenues and expenses so it doesn’t look like an unpredictable feast/famine setup. Banks prefer slow and steady to unpredictable windfalls.
- Have your evidence files ready well in advance. Two years of personal and business books and tax returns. Lease information. All your business activity statements since your last tax return. They might not ask for it up front, so it becomes a last-minute panic when they do. Start assembling it now.
- Check out your current public credit file to see if there ere are any skeletons in your closet. Do that for free here. Better you know now than when you’ve just put a deposit down on a house.
- Make sure you get formal pre-approval before you buy or bid at auction. As I found, the verbal ‘not a problem’ carries no weight, and you can lose your 10% deposit. Brutal.
Anyway, it just settled as I write this so we are now guaranteed of a holiday house that will take a dog, there’s a win. Time for a quiet Reschs. Cheers to crushing debt burdens.
This article was first published on the Undisruptable website. Ian Whitworth’s book Undisruptable: Timeless Business Truths for Thriving in a World of Non-Stop Change is out now from Penguin Random House.
