How do banks assess the income of self-employed individuals (SZČO) in terms of a mortgage application? Is it necessary to pay high taxes? What should you consider before applying for a mortgage?
When it comes to mortgage applications, there are areas which banks assess identically regardless of whether they are dealing with an employee or an self-employed person. These include:
• payment discipline verified in the Central Loan Register,
• maximum LTV (loan amount to property value ratio),
• DTI (total indebtedness of the applicant must not exceed 8 times his/her annual income),
• maximum maturity etc.
(You can find more details about mortgage application requirements in my previous article)
Then there are other areas which are assessed differently by banks, such as:
• duration of employment/time in business,
• income level,
• required documentation accompanying the application etc.
Duration of time in business for self-employed persons (as mortgage applicants)
Entrepreneurs may only apply for a mortgage after submitting their annual tax return (usually a calendar year). Banks also have a minimum time in business requirement. This acceptable period differs from bank to bank.
| Minimum time in business | Examples of banks accepting a given time in business |
|---|---|
| 6 months’ business accounts | Slovenská sporiteľňa, ČSOB |
| 12 months’ business accounts | Tatra banka, Prima banka, mBank |
| 18 months | VÚB |
| 24 months | OTP Banka, Poštová banka, UniCredit |
Peter registered as a self-employed person in October of the previous year. In the beginning of April of the current year, he plans to get a loan to buy an apartment (Peter’s accounting period is a calendar year, i. e. from 1st January to 31st December). Although Peter does fulfil the minimum time in business requirement of 6 months, these do not constitute a single closed accounting period. Therefore, he cannot apply for a mortgage loan at the moment but can only do so after closing the current year and filing his tax return.
Assessing the income level of a SZČO in terms of a mortgage application
When an employee applies for a loan or a mortgage with a bank, the bank verifies his/her income level via the Social Insurance Company. Based on his/her net income, the bank decides how much money and under what conditions they lend to the loan applicant. However, if the mortgage applicant is an a self-employed person (SZČO), verifying his/her income is much more difficult for the bank.
In case of self-employed persons (SZČO), banks assess the entrepreneurial income in two ways: The entrepreneurial equivalent of the employee’s net pay is assessed based on two variables:
• profit: profit / 12
• turnover: percentage of the turnover / 12 (the amount of % is set by the bank)
Mortgage for a self-employed person (SZČO) – calculation of income based on profit
Banks approach a self-employed person’s income in two ways. A standard calculation of the net income which can be applied by all banks is based on the profit or loss performance, specifically:
monthly income of SZČO = (basic taxable amount – tax paid) / 12
Note: basic taxable amount before deducting the non-taxable part of the tax base (e. g. for taxpayer/spouse), row no. 72 of the 2020 Type B Tax Return Form.
John is a self-employed entrepreneur whose self-employment income in the closed accounting period amounted to EUR 48,309. He claimed real expenditures amounting to EUR 38,130. The basic taxable amount (before deduction of the non-taxable part) amounted to EUR 11,442. John paid the tax amounting to EUR 1,360 (after deduction of the child tax credit etc.).
In the bank’s view (when making a calculation based on the basic taxable amount), John’s net monthly income amounted to EUR 840. (basic taxable amount: EUR 11,442 – tax paid: EUR 1,360 / 12 = EUR 840).
Mortgage For A Self-Employed Person (SZČO) – calculation of income based on turnover
Compared to calculating the income based on the basic taxable amount, banks differ in two aspects when it comes to this method:
• not all banks accept this method of calculating the income – some banks only apply the basic taxable amount,
• sales percentage level included in the calculation.
An example of income calculation might look like this:
net monthly income of SZČO = (10 % of sales) / 12
This table contains individual banks which accept both methods of assessing the income of self-employed persons (SZČO). That means that apart from the calculation based on the basic taxable amount, they also accept assessment of the income as a percentage of sales for self-employed persons.
Percentage of sales of a self-employed person (SZČO) accepted by banks in terms of a mortgage application.
| SZČO sales persentage level | Bank |
|---|---|
| 10 % | Slovenská sporiteľňa, VÚB, Prima banka |
| 20 % | Tatra banka, mBank |
| 35 % | ČSOB |
| 60 % | Slovenská sporiteľňa for self-employed persons with flat-rate expenditure |
| 50 % | VÚB – for annual turnover up to EUR 30,000 |
| over 40 % | Tatra banka, Slovenská sporiteľňa – individual assesment |
John is a carpenter whose self-employment income for the closed accounting period amounted to EUR 48,309. He claimed real expenditures amounting to EUR 38,130. The basic taxable amount (before deduction of the non-taxable part) amounted to EUR 11,442. John paid the tax amounting to EUR 1,360 (after deduction of the child tax credit etc.). According to the calculation based on the basic taxable amount, his net monthly income amounted to EUR 840.
If the bank based its calculations on 10 % of sales, his net income would amount to EUR 40,25 (sales: EUR 48,309 x 0.1 / 12). With this level of monthly income, the bank would not be willing to lend him a single Euro.
However, if he claimed flat-rate expenditure, his net income as calculated by the Slovenská sporiteľňa would amount to EUR 2,415.45 (sales: EUR 48,309 x 0.6 / 12), which is almost three times the amount calculated based on the basic taxable amount.
This significant difference in the net income level thus results in a significant difference in the amount the bank would be willing to lend to John as a self-employed person. (Note: John is a client who is married; his spouse receives parental benefit; they have one child; no other commitments; 80 % financing; 30 years’ maturity.)
With the same income, the maximum amount John would be able to borrow as a self-employed person would differ by at least EUR 74 000, which might constitute a price of a one-bedroom apartment in some regions.
| Method of calculating the income | Illustrative maximum mortgage amount (DTI 8 / DTI 9 upon exception) |
|---|---|
| basic taxable amount – EUR 840 | EUR 100,000 / EUR 113,000 |
| 40 % of sales – EUR 1,610 | EUR 174,000 / EUR 196,000 |
The difference in the loan amount a self-employed person (SZČO) can get results mainly from the method of calculating the net income used. Therefore, it is much more important for self-employed persons to compare offers of multiple banks when choosing a mortgage than for employees.
This article contains examples of several variables which significantly impact the mortgage amount the bank is willing to approve/lend to an entrepreneur, compared to an employee. That is why you, as an entrepreneur, may want to proceed as follows:
1. Start thinking about the mortgage before filing your tax return.
2. Do not rely solely on the bank whose services you have been using for the years, but rather apply for the mortgage with multiple banks (at least two).
3. Consult a professional who will direct you to specific banks according to the current market conditions and your needs.
4. Make sure to benefit from pre-approved loans as much as possible (e. g. a mortgage certificate, a mortgage for a non-specified property). For example, when buying a property, you will thus not be risking losing your deposit if the bank does not give you the loan (in the amount you have applied for).
If you do not have a capable professional at hand to help you in your situation, please do not hesitate to contact me via my contact form. I will be happy to assist you (not only) with applying for a mortgage.