While employees have their earnings confirmed by their employer, businesses submit their most recently completed tax return. A mortgage for entrepreneurs is available for self-employed persons (self-employed) whose business is profitable. Therefore, if you have more expenses than income for the entire tax year, you will not get a mortgage from the bank. The amount of the taxable amount is the determining factor in assessing the creditworthiness of a business.
This will be largely influenced by whether you claim flat-rate expenses as a percentage of income or whether you count your actual expenses in your tax records. The higher your tax base, the higher the mortgage you can get. “From 2021, self-employed people can pay a flat rate tax if they meet the statutory conditions. Those who have signed up to the flat-rate tax scheme will not file a 2021 tax return or insurance statements this year. Domestic banks will apply the new creditworthiness assessment methodology to these mortgage applicants for the first time this year,” says Veronika Hegrová of fintech startup hyponamiru.
Flat-rate expenses are chosen by small tradesmen with low costs
If a small businessman issues only a few invoices per month and has minimal expenses, it is usually most advantageous for him to use flat-rate expenses as a percentage of income. For craft and agricultural trades, 80% of income can be automatically expensed without having to produce individual invoices and receipts. The maximum amount of expenses that can be claimed is CZK 1.6 million.
For free, tied and licensed trades, a 60% flat rate can be applied to expenses up to CZK 1.2 million. If the activity carried out is not a trade (e.g. freelancers, doctors, lawyers), a flat rate of 40% can be applied, but not more than CZK 800,000 per year. For rental income, a 30% flat rate of up to CZK 600 thousand per year can be applied.
Cost modification by activity
“When taking advantage of flat rate expenses, the mortgage specialist will be interested in the line of business. For example, in the case of an IT specialist, the bank may claim expenses at 50% instead of the 60% flat rate. Each bank has its own formula for calculating income from tax returns. In practice, this means that an entrepreneur can get a mortgage of CZK 3 million from one bank and CZK 3.5 million from another,” says Veronika Hegrová.
Banks routinely favour the professions, which include, for example, lawyers, doctors and solicitors. Modifying expenses will increase the income of the entrepreneur, who will then qualify for a higher mortgage.
Model example: Karel Novák (38 years old) works as a freelance graphic designer. He invoices a total of CZK 800,000 for the whole year. Mr Novák works from home and his annual expenses for work supplies do not exceed CZK 40 000. In his tax return, he claims a flat-rate expenditure of 60%.
|Lump sum expenses 60 %||Modified expenses 40 %|
|Annual income||800 000 Kč||800 000 Kč|
|Tax base||320 000 Kč||480 000 Kč|
|Maximum mortgage amount (max. DTI value)||2 700 000 Kč||4 080 000 Kč|
Note: The entrepreneur claims only the basic ratepayer relief and does not repay any other loans or borrowings. The method and amount of calculation of modified expenses varies from bank to bank.
When applying for a mortgage after 1 April 2022, Mr Novák’s total indebtedness must not exceed 8.5 times his net annual income (note the DTI indicator set by the Czech National Bank). After the modification of expenses, Mr Novák could obtain a mortgage that is less than CZK 1,4 million higher than the flat-rate expenses of 60%.
Mortgage advisors often meet with entrepreneurs who have high annual incomes but also high costs. If they keep tax records and claim expenses at the actual amount, the low tax base will not allow them to take out a higher mortgage. Veronika Hegrová adds: “Some banks provide a so-called turnover mortgage, where the income of the sole trader is derived from the turnover. For example, the bank can count a quarter of the annual income as part of the annual income. In this way, an entrepreneur with a low tax base can obtain the required mortgage. The calculation methodology and other conditions vary from bank to bank in the case of a turnover mortgage.“
Model example: Mrs. Petra Malá (41 years old) runs a custom tailoring shop. Her income for one tax year was CZK 1.8 million. She pays CZK 1,6 million a year for the rent of the tailor’s shop, materials, training and accountants. Mrs Malá keeps tax records and claims expenses at the actual amount.
|Actual expenses||Revolving mortgage|
|Annual income||1 800 000 Kč||1 800 000 Kč|
|Calculated net annual income||146 508 Kč||432 000 Kč|
|Max. mortgage amount||1 245 300 Kč||3 672 000 Kč|
Note: The business only claims basic ratepayer relief and does not repay any other loans or borrowings.
Mrs. Malé was offered a reverse mortgage by the bank. The calculated annual income is CZK 432,000, which is sufficient to obtain a mortgage of up to approximately CZK 3.6 million. If the bank were to base the mortgage on the tax base, Mrs Malá would be able to obtain a maximum mortgage of CZK 1 245 300.
Mortgage for self-employed persons and documents
Businesses claiming expenses in the actual amount or using the expense lump sum must submit at least one tax return for the last tax year to the bank when arranging a mortgage. At the same time, they must submit a certificate of filing the tax return with the tax office and a tax payment receipt. If you owe tax, you will not get a mortgage.
“You should also prepare bank statements to verify the amount of income and regularity of payments. The number of statements varies from bank to bank. They may require only one, but they may also require the last six account statements,” adds Veronika Hegrová.You will need a certificate of debt-free status from the tax office, which you can obtain after paying a 100-crown administrative fee. This document is often only presented when the mortgage loan is taken out.
All banks keep track of when the mortgage applicant started their business. You will not succeed with mortgage lenders with a fresh business license. Generally, banks require at least six months of history as a minimum and some insist on as little as one year.
Proof of income under the flat-rate tax scheme
The new flat-rate tax institute can be used by entrepreneurs from the beginning of January 2021 if they meet the statutory conditions. For these mortgage applicants, banks will not have access to the 2021 tax return.
The list of documents to be submitted to assess the creditworthiness of these applicants may vary slightly from bank to bank. For example, banks may require the submission of a 2020 tax return, business account statements for the last six months or more, and confirmation of entry into the flat-rate scheme.
Expect banks to be interested in your source of income. Only those transactions in bank accounts that are clearly related to business activity will be counted. For example, cash deposits into an account without documented invoicing, one-off transfers from another account owned by the entrepreneur or accounts from family members, income from savings and investment products or one-off income from, for example, the sale of property will not be recognised.
The bank will calculate the entrepreneur’s expenses as a percentage of the income earned (note: similar to entrepreneurs claiming lump-sum expenses as a percentage of income in their tax returns). The percentage of the lump sum will depend on the type of activity carried out – for example, for self-employed persons in the field of information technology, expenses of 60% of the income earned may be counted.