When you’re busy building a business, planning for some of life’s big milestones can easily slip by the wayside. Then once you’re ready to say, buy a house, you hit a roadblock when it comes to getting a mortgage.
Traditional banks and lenders have a narrow view of risk and serviceability. To them, the circumstances are black and white:
- Startup founder/self-employed= high risk
- Founders paying themselves a lower salary= low serviceability
And this makes things difficult for founders who are often running at a loss while setting up their business.
In a bid to make things easier for founders who are trying to get a mortgage, we did two things:
- Created a list of founder-friendly mortgage brokers and lenders
Check out our new Open Source VC resource where we’ve added mortgage broker and lender recommendations from founders.
👉 Get access to our Mortgage Broker & Lender List
📩 Have you worked with or had great advice from a broker or lender? We’ll add them to the list! Recommend them here
- A founder personal finance discussion panel
We got our community together for a conversation about founder personal finances with the help of Sara Saidi, Director of Athena Select at Athena Home Loans, Ryan Smith, Partner — Private Clients at PwC and Kent Hindmarsh, Senior Partner at Crestone Wealth Management. The session covered everything from getting mortgages to structuring your company, diversification, taxes and more.
🎙You can tune into the ClubHouse recording of the session here
📝Dive into the Q&A notes from the panel below.
The information in this post is for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature, you should seek advice from a qualified and registered legal practitioner or financial or investment adviser.
🏠Sara Saidi, Director of Athena Select at Athena Home Loans
Why is it challenging for a founder to get a mortgage?
Let’s use the Big Four and their subsidiaries as an example. A lot of them wouldn’t understand what founders and startups are. What they look at is your income structure. So when they are considering you as an applicant for a home loan, they look at the three C’s of credit:
- What’s your character? For example, how long you’ve lived at your address, how long you’ve been in a new job and do you have a good credit history?
- What’s your collateral? For example, is the house you’re looking to purchase a good security, and how much equity do you have in that property?
- What’s your capacity (income)? For example, are you earning enough to be able to service this debt?
Traditionally, with anyone that’s a director or shareholder of a company, even if you’re paying yourself a PAYG salary, they will look at you as though you’re self-employed. So then the self-employed rules come into effect, and they’ll ask for your last two years of company financials, personal financials, your financial statement from your accountant and your tax return.
What are they looking for? They’re looking at the bottom line — are you making a profit or operating at a loss? Even if you’re operating at a loss for a perfectly good reason e.g. you’re injecting revenue back into the business to keep growing, they look at the bottom line and see a loss. They then look at what shareholding you have in the company and then attribute that loss to your shareholding.
If you’re paying yourself a PAYG/PAYE salary and have the paperwork to demonstrate you’re receiving a good income from your company, will lenders take that into consideration, or will they only look at a company’s balance sheet?
They’ll look at your personal tax return, payslips and bank statements and see you’re paying yourself a regular salary, but then they’ll go, “as a shareholder of this company, you are liable for any losses coming from this company.” And then they offset that salary with those losses, which is where the challenge comes in.
Do lenders think about the differences between a startup with VC funding vs a cafe with no external support?
If you walk into a Big Four branch, they’re not going to look at a startup too differently to a cafe from down the road. They have a policy, and they will apply it, and they don’t have much discretion to waive that policy one way or another.
If you go to a financial broker, they can start to look at things differently; at your individual situation, and think about which lender may look at it in a different light.
On the other side is private banking. They’re set up differently and have greater experience and more understanding of individual circumstances. They’re able to look at things outside of the status quo and take into consideration the balance sheet and what a company’s assets look like.
Does it help or hinder if your company is banking with the same bank you apply to?
Going back to the three C’s (Character, Collateral, Capacity), they will consider if you have a long-running history with them for the character component. But they do need to look at all three components.
What can founders do in the lead up to trying to get a mortgage to improve their chances of success?
A source of frustration for many is how lenders look at your bank statement, expenses and personal liabilities. For any borrower, in the three months leading up to speaking to a lender, cut back on the coffee expenses as potentially lenders will go line-by-line.
For founders in particular, if you speak to a broker or private banker, start that conversation as early as possible. Don’t leave it to the point where you’re like, “I’m ready to get this loan in place.”
What do the differences in positive and negative credit reporting mean for people?
Before positive credit reporting was introduced, negative reporting gave the lenders the history of inquiries you had with telcos, finance, and home loan providers. You wouldn’t see any information about whether the debt was open, closed, current or the repayment history.
What positive reporting shows you is a credit score that takes all those inquiries into account and 18 months worth of repayment history on the debts you hold.
Paying on time is important. Lenders don’t report until you’re 45 days overdue, so there is a little bit of leeway. You want to find a middle ground between a person who’s chasing credit card points and someone who hates credit cards, as that means you have no credit or repayment history.
Can a business loss be mitigated through a guarantor?
Guarantors generally aren’t there to offset serviceability challenges. You usually use a guarantor because you don’t have enough of a deposit, or you want to lower your LVR (Loan to Value ratio) so that you don’t have to pay the lender’s mortgage insurance.
For tax structuring, does it help if you step off the board?
It does if you’re not a director. Even if you step off while you’re going through the process and then step back on, lending is based on that point in time. From a character perspective, they must consider if a person may be risky in the future. But at that point in time, they’re looking at where the borrower is at right now.
🧾Ryan Smith, Partner — Private Clients at PwC
What advice would you give a founder at the beginning of their journey around tax planning?
Planning is key. Where possible, founders should connect with a professional tax advisor. It may just be an initial upfront meeting that doesn’t go anywhere, but it gives the founder a background as to what they should consider.
This may include discussing:
- Future plans around funding
- The different impacts of debt and equity funding
- Access to SEC concessions
- Profit timeline
- The planning of a possible exit
This all may sound a bit overwhelming when you’re just starting out. But as your business grows and things progress, you’re going to end up wasting time in the future having to plan properly, so it’s best to get on top of this early.
What are some of the things that can come back to bite you if you don’t plan well from the beginning?
There have been cases where founders are operating their business through a family trust itself instead of having the family own equity in it. Many government incentives don’t apply to family trusts, so you need to have a company structure to operate through.
When you think about a trust, it’s a separate legal entity from a tax perspective. When it’s a discretionary family trust, which is very common, you can’t issue equity in that. So to get outside investors in, having a trust doesn’t work, making it hard to get extra capital in.
What are the pros and cons of founders owning their shares through a family trust vs directly?
Family trusts are basically discretionary trusts, i.e. no one has a fixed entitlement to the income or capital of the trust itself. Two reasons why people set up family trusts are:
- From an asset protection point of view. If a family trust owns the shares in your startup, they’re no longer considered an asset of yours. That means if you were to get sued because the trust owns the asset and is a separate vehicle to you, it’s a good asset protection play.
- When a business generates a profit, if a founder owns that business outright, a dividend has to flow up to the shareholder, being the founder, and they can pay tax of up to 47%. Whereas if you have a family trust, a dividend gets paid up to the family trust. The trustee of that trust, which is generally the founder or a company controlled by the founder, can determine where dividend should be paid or get distributed to. And that may be to a non-working spouse or a separate company that they control, which means the tax rate is 30%, instead of 47% in the founder’s name.
If a company is shaping up for an exit or IPO, what can founders do in the lead up to optimise their tax situation?
It’s important to be prepared sooner rather than later. You should make sure you’re getting your ducks in a row, e.g. your corporate records and tax lodgements are up to date. Suppose someone comes in and looks at your business, and your tax affairs and corporate records aren’t in order. In that case, they’ll ask for a reduction in the purchase price, or they’ll put a big warranty in whereby you may have to park funds aside for a future potential ATO clawback.
💰Kent Hindmarsh, Senior Partner at Crestone Wealth Management
Who should founders go to at the beginning of their financial journey?
Financial planners are a great help when it comes to structuring things because they can start at the beginning and plan things like what your cash flows look like and provide help if you need a home loan.
An accountant will help you set up your trust and super funds to be the most tax-effective.
What are some tips early on regarding cardinal rules, like paying off your credit card debt first?
Accountants will always say pay off your house first because it’s not deductible debt. If you do that, you can draw off your house and use deductible debt to start investing. If you’re going to be really sensible about investing, you will do a monthly or quarterly investment plan, e.g. setting up a direct debit with Spaceship.
How should people think about robo-advisors and self-serve wealth products?
First of all, you want to work out who’s behind them.
People need to be aware that an advisory is generally there to save you from yourself. When you’re on these platforms, you may make some silly decisions based on the emotional rollercoaster of what’s happening in the papers.
If you can do it yourself using one of these platforms in a really structured way, they can be a great place to start.
What can we learn from where HNW individuals are parking their money, and how can others take advantage of similar trends?
Private markets such as venture capital are a good example. The long term returns on private equities have been better than listed equities, but you can’t get access to your money for a long period of time. Industry Super funds can give you access to private equity, but it can be tricky to do it any other way.
How should founders think about diversification in their investments?
The saying is: fortunes are made through the concentration of risk, but you diversify to maintain them. To avoid exposure to one particular sector, people want to diversify their asset classes. You can think of diversification in 3 buckets — your:
- Absolutely-don’t-want-to-lose bucket
- Normal investment bucket
- I’m-having-a-real-crack-here bucket
Generally, founders want to maintain their wealth and grow it slowly as opposed to doubling down.