Applying for a loan? Find out how your income is assessed by the banks. For Lawyers at all levels
Promoted by Legal Home Loans.
“You don’t get paid for the hour, you get paid for the value you bring to the hour.” — Jim Rohn
As a high-powered legal professional, this statement from Rohn resonates profoundly. You’ve worked hard to understand the legal system, and your income is a reflection of the value you bring to the community. The way you’re remunerated is transparent and understood.
In the world of finance and lending however, there is a vagueness surrounding how this all works, and ostensible ‘common sense’ (as you may have already found) is not that common.
Let’s look at this through the lens of buying your home. Often, it will seem very straight forward as to how you can afford the loan you need to buy the property you want. The banks however tend to make it much more convoluted than this. The factors that they account for are many, and most of the time fairly irrelevant when it comes to people working in senior legal positions; it’s purely a lack of education and specialised understanding in the way your career works.
This ultimately leads to undue heartache, frustration and most (dangerously) of all, misinformation when applying for finance. Knowing a few things about how lenders perceive the way you bring home your income will no doubt help you to better understand poor experiences you have had in the past as well as allow you to navigate your way to the ideal loan next time the need arises.
Enter—the LHL guide to lawyer income in Australian banking.
PAYG – The most straight forward way to obtain a loan
Working long hours in private practice, as an in-house counsel or for the government, may at times seem an arduous task, but at least after those 3am finishes you can sleep well knowing that as a lending candidate, the way you are paid is as straight forward as it gets.
Lenders will look at your annual income after super and obtain the figure used to calculate borrowing capacity.
The main things you need to be aware of as a PAYG employee is that HECs will be taken out of net income available to service the loan, and any other non-voluntary pre & post tax deductions will be treated similarly.
Firm Owners – Let the bank know you’re the boss
So you’ve taken the leap and decided to start your own firm. Fantastic! But how does this bode when applying for finance?
Borrowing as a self-employed applicant can be more difficult than when you were working for someone else but not impossible. There are certainly some benefits to working as a lawyer as a law firm is perceived as a lower risk business to most others.
A few myths to bust first:
- “I need 2 years trading history to be eligible to borrow”—Not true, especially for a lawyer who has opened a law firm. We see many applications approved with only 1 year financials and tax returns available with most banks fairly accepting that you have started a business doing the same job for the same or similar clients to when you were employed.
- “I can’t borrow if I make a loss”—Also not true, as there are many different areas income can come to you excluding the bottom line net profit of the business. E.g., your salary for the year and addback accounting costs such as depreciation would be looked at by the lender as income available to service a loan (provided that they exceed the loss)
- “Debts in my business will be applied to my personal balance sheet”—Again, not true as there are lenders who will look at these as contained within the company.
- “I didn’t make a lot of money the year before last & the lender may take an average”—Typically lenders will take your most recent year as the most important and there are in fact lenders who will specifically look only at the most recent year.
A few general tips:
- As a self-employed lawyer there are many ways to minimise your tax, remember however that higher taxable income & net profit is the easiest way to ensure you can borrow money.
- Be careful of distributing money through trusts to other family members as this can create holes in your capacity.
- If you have recently left your PAYG role and just started your new firm, yet you were a high performer in your previous roles, some banks will lend to you on the strength
of your prior billing.
Partners – The top end of town
You’ve made it to the top, you’re making significant income but still find it difficult to explain your remuneration to your bank or broker. This is because there is a general lack of understanding in the banking industry around how partners are remunerated.
Being paid in gross dollars without payslips and depending on firm receiving additional inconstant drawings makes it difficult for lenders to tick their responsible lending box.
The reason being, is that partners sit in a grey area between self-employed and PAYG that a lot of lenders have no idea how to verify. Many will request two years tax returns, which is fine provided you haven’t only recently made partner or your points haven’t increased substantially.
Our best advice around this income structure is to garner advice from someone who understands. You would be amazed how quickly you will be requested to provide a payslip when you walk into your local branch or brokers office to apply for a loan.
The team at Legal Home Loans have been working with a few select lenders to set precedent that allows a CFO letter and a bank statement providing evidence of drawings, to be the only documents needed to verify income.
Additionally, we’ve forged some excellent relationships with the private banks at these institutions which will be able to offer you a more high-touch and tailored banking experience to match your expectations.
Barristers – Fight for the right to borrow
Similarly to self-employed firm owners, barristers will find it more difficult to borrow after sitting the bar.
As a sole-trader, any expenses you incur in the business will come off your bottom line and affect your ability to borrow.
Debts taken on such as overdrafts, car leases and loans for chambers will also be sensitised and applied to your personal balance sheet for any new borrowing.
Tax debts can be navigated but know that lenders perceive this as a conduct risk, meaning you’ll need at least need a bank balance available to cover any outstanding amounts with the ATO on application.
Your time as a legal professional is most valuable: The importance of which can be boiled to one of the two tenets, time well saved or time well spent. You’ll get both with LHL. When applying for finance its important you engage a professional that understands the above & more.