Mortgage as a Sole Trader
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Table of Contents
Mortgage as a Sole Trader
David explains how the mortgage process works if you are a sole trader.
Podcast approved by The Openwork Partnership on 04/09/2024.
Can I get a mortgage if I’m a sole trader?
Absolutely. There are a few more things to think about, in terms of getting your paperwork ready and improving your success rate with mortgage lenders. But certainly, being a sole trader should not impede you from getting a mortgage.
How long do I need to be a sole trader before I can get a mortgage?
The minimum time is one year. One or two high street lenders would consider giving you a mortgage with just 12 months of sole trading history, but ideally you’ll have two or three years behind you.
The longer you’ve been doing it, the more you could demonstrate a track record and consistency of income. Generally you need a good credit score with just one year’s records – but it is possible.
What documents do I need to prove my income?
First, there are the standard documents for identification and proving your deposit: which means photo ID with a passport or driving licence or even a shotgun licence. You’d need some address identification to prove you are living where you say you live.
Then you need to evidence your deposit. If that’s coming from savings, four months’ bank statements is typical, showing the build-up of funds. We also need some bank statements to show your day-to-day expenditure.
I appreciate not everybody who’s a sole trader has a separate business account, and that’s okay as long as we could see the income coming in. Mortgage lenders want to get a picture of your turnover.
The most important documents for a sole trader are your tax records. Some lenders call them tax calculations, others call them SA302 or self-assessment 302 documents. Effectively, it’s the same thing. It’s a summary page from HMRC showing your earnings and how your tax has been calculated.
That might come from an accountant on their own commercial software, but it’s still acceptable by a mortgage lender. The second document you’re going to need is something called a tax year overview. That will tell the mortgage lender how much tax was due and whether it is still owing or been paid.
Sometimes a mortgage lender might ask for something called an SA100, which is effectively your entire submission to HMRC. That could be about 20 pages, and gives more detail about how your income was calculated. It’s often used where a sole trader has a rental property in the background. It gives an idea of the incomings and outgoings on that rental property and the cost of the finance.
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How does the mortgage process differ between a sole trader and a limited company?
In some respects, it’s absolutely identical. Some mortgage lenders would treat you exactly the same, whether you’re the director of a limited company or a sole trader. They would still assess your income by looking at your SA302 tax calculations and tax year overview.
With other mortgage lenders, there are differences. For a sole trader they would use tax calculations, but if you have a limited company they would potentially look at the strength of the business via company accounts.
They would calculate a company director’s mortgage borrowing capacity not by what you’ve withdrawn from the limited company but your salary plus the share of any profits in that company. That’s the main difference – whether they look at your tax documents or company accounts.
How much can I borrow as a sole trader and do I need to put down a bigger deposit?
The minimum deposit that you need is five percent. That’s exactly the same if you’re working through your own company or if you’re employed.
Mortgage lenders tend to be a little bit more cautious with anybody who’s self-employed. I generally recommend to my clients that if they’ve got more than 5% – perhaps 10% – and can afford to put it down, that would give the lender a bit more confidence. There’s more equity going into the property.
As a sole trader, mortgage lenders will look at your net profit after your expenses. If you’re turning over, say, £50,000 a year, but you’ve got £20,000 of expenses, that leaves £30,000 profit.
Then we apply the multiples, which again differ between mortgage lenders. The total will also be impacted by your financial commitments and dependents. Typically, the amount you could borrow is going to be somewhere between four and five times your net profit after your expenses.
What if I have bad credit? Can I still get a mortgage as a sole trader?
If you have bad credit and you’re a sole trader, it’s still possible to get a mortgage. There are some specialist lenders for people with bad credit, who will also lend to sole traders.
Even better, some of those lenders I’m thinking of could even lend with one year accounts.
It will depend on the level and severity of your credit issues.
Can I get a Buy to Let mortgage as a sole trader?
If you’re getting a Buy to Let mortgage in your personal name, rather than through a limited company, the mortgage lender is going to look at your last year of submitted accounts.
The amount that you could borrow on a Buy to Let is impacted by whether your profit demonstrates that you’re a lower or higher rate taxpayer. On a Buy to Let in a personal name, the amount you could borrow could be hugely impacted by your tax status.
If you’re a higher rate taxpayer, you could actually borrow less on a Buy to Let mortgage than a lower rate taxpayer. I know it sounds strange, but that’s just the way it’s worked out.
How does the remortgaging process work as someone who is a sole trader?
A remortgage as a sole trader is almost exactly the same process as getting a first-time mortgage. The same documentation would be expected. You need proof of income with tax calculations or SA302s and your tax year overviews to demonstrate your income. Then you’ll provide bank statements to show at least three months of income coming in from your work, the level of turnover and expenses.
We then need proof of address for the house or flat you’re living in and ID to prove you are who you say you are. The only difference is that you don’t need to provide evidence of the deposit – that’s now the equity in your property
How do I apply for a mortgage as a sole trader?
You might try and brave it yourself and speak to your own bank or any high street bank. Any of the high street banks are going to be able to cater for first time buyers and sole traders.
However, there are a lot of nuances with self-employment in terms of finding the right mortgage lender for your individual circumstances. That may take the skill and experience of an expert mortgage broker.
We deal with sole traders on a day-to-day basis and we know which lenders could lend you the most, or offer you the right terms based on your individual situation.
How can a mortgage broker help me find a mortgage as a sole trader?
A mortgage broker is going to take away a lot of stress and aggravation. You might spend hours of your time trying to find the right lender for your circumstances, while most mortgage brokers will have an instant idea straight off the bat, just by looking at your paperwork.
You’re going to save yourself a lot of time, energy and hassle. You’re also going to improve your chances of mortgage success by speaking with a mortgage broker that knows how to deal with your individual circumstances.
MOST BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Approved by The Openwork Partnership on 04/09/2024
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We aim to provide advice to those with:
- Less than 1 year self-employed
- 5% Deposit
- Less than 3 years in the UK
- High day-rate with low net profit