Ask Paul: I make $600k a year but I can't refinance my home loan

Dear Paul,

My wife and I have been subscribers to Money magazine for over a decade. In that time I have read many letters and articles where you and your writers have encouraged people to shop around for a better deal on their home loans and generally try to avoid paying more than you have to.

We own our own business, which in 2020-21 generated more than $667,000 in revenue. This has risen steadily year on year from $383,000 in 2016-17. Earnings before interest and taxes (EBIT) has grown from $148,000 to $326,000 in the same time. 

We have always engaged our (fairly expensive) accountant and have managed to keep our personal tax liability in a reasonably favourable range with the use of various company and trust structures on his advice, as well as making use of government asset depreciation allowances during COVID. 

With interest rates rising sharply in recent months, we applied to refinance our home loan and investment loans to a better interest rate.

Our applications were rejected on the basis that we don't meet the serviceability requirements. I suspect that they take a few key numbers from our financials and plug them into a basic formula to get a yes or no. 

I have spoken to the lenders to reiterate that our financial structure is such that the number on the bottom line of our tax return doesn't necessarily have the same meaning that it might in the case of a simple wage earner, with respect to our ability to service our loans. 

The response has been that we still need to show more taxable income on our tax returns to be able to qualify for the refinance.

One has said that I can't have it both ways, in that I either need to report a higher taxable income (and therefore pay more tax) to qualify for the loans, or I pay less tax and accept that I can't qualify for the loans, even though they will cost me less than I'm already paying.

This seems like it's rigged, in that any potential savings on my mortgages will just get eaten up by the tax man. Care to prove me wrong? I'm keen to hear your thoughts. - Lachlan

I'm not going there, Lachlan! In particular after the royal commission, lenders have gone really hard on loan qualification.

Much to my amusement, I recently got knocked back on a new credit card as my income these days derives more from super and investments, not personal income.

The call centres have a cookie-cutter approach, but I made a pest of myself until I got to someone with authority who chatted to our accountant. All sorted and new card issued.

So, no, I can't prove you wrong. I think a standard application loan is likely to fail.

But in your shoes, I'd be changing tack. You have a very successful business. Does this give you access to a business or private banker with an institution who is well aware of your solid and growing returns?

My next move would be to go to a strong mortgage broker who deals with business clients like you. The banks have effectively outsourced much of their lending to mortgage brokers.

The really good brokers have a very trusted relationship with lenders. The lenders get them to do a lot of the due diligence. I would argue that, in the absence of a business or private banker who knows you well, a mortgage broker is the person who will understand your tax structures, talk to your accountant if necessary and make your case to a lender.

My suspicion is that what you say is totally correct. At a lower level of seniority, you are being plugged into a simple formula and being spat out. Clearly, people with a sophisticated tax structure and ample assets and income can get a loan. I think you need to elevate your discussions, not change legally effective tax structures.

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