Getting a mortgage as a sole trader
If you’re registered as a sole trader, it can be difficult to know where to turn to when it comes to getting a mortgage. The inflexible ‘one size fits all’ approach taken by high street banks and building societies doesn’t allow for the twists and turns that a sole trader’s income can take, so you can find yourself facing unreasonable terms or being frozen out altogether.
However, this certainly does not mean you can’t get a mortgage as a self-employed sole trader. There are many specialist lenders in the market who will be able to take a flexible approach and offer a mortgage to suit your requirements.
Get in touch for a free initial, no obligation discussion about your mortgage situation.
- How long do I need to have been trading before getting a mortgage?
- Try our Self-Employed mortgage calculator
- Read our Self-Employed mortgage guide
- How to get a mortgage as a sole trader?
- Do I need to put down a bigger deposit if I am self-employed?
- How do I choose the best mortgage as a sole trader?
- Getting the right mortgage advice as a sole trader
- Sole Trader vs. Limited Company Mortgages
- FAQs: Other considerations as a sole trader
Do you qualify?
Fill out our quick and easy Self-employed calculator below. We only require a few details to see how much you may be able to borrow.
NO CREDIT CHECKS!
How long do I need to have been trading before getting a mortgage?
Generally, mortgage lenders will want you to have been trading in your current business for at least twelve months, or perhaps one whole April–April tax year.
However, many will prefer to see two or three years of business accounts in order to get a more complete picture of your business and potential income in the future.
If you are under a contract but have been trading for less than a year, lenders may be willing to use your current contract as the basis for a mortgage decision. If there is sufficient time on the contract yet to run, the lender will use your day rate to extrapolate your annual income to use when assessing a mortgage’s affordability and the amount you can borrow.
How to get a mortgage as a sole trader?
Following the 2008 financial crash, new regulations set down by the Financial Conduct Authority (FCA)[1] stipulate that lenders have a responsibility to verify proof of self-employed mortgage applicants’ incomes, just as they do for any traditionally salaried borrowers.
Lenders typically need to see your business accounts for at least the last twelve months and/or your SA302 year-end tax calculation sent out by HM Revenue & Customs (usually with the corresponding tax year overview).
Requirements will vary from lender to lender, but usually they will ask for one, two or three years’ worth of accounts (and probably SA302 forms) according to their own criteria. These accounts will need to be certified by a chartered accountant.
As a sole trader, the affordability calculations and the amount you will be able to borrow will be based on the net profit from your business, with both again varying from lender to lender.
The mortgage amount offered will typically be a multiple of your annual income figure, usually between 3.5 to 5 times your income. Lenders will assess a number of other factors to help them determine your borrowing. They will look at things like your credit history, deposit amount and the property type.
Depending on the lender, when they ask for two or three years’ accounts, they will use one of the following methods to help calculate how much you can borrow:
- taking the most recent year’s figure as a guide,
- using the lowest figure in the range,
- or most commonly they will calculate an average annual income based on all years This can then be used as a basis for their mortgage affordability calculation.
When applying for a mortgage as a sole trader there are a range of documents you will need to provide to your lender. The most common documents lenders ask for are:
- Identification – typically a passport or driving licence.
- Bank statements – usually a minimum of 3 to 6 months’ worth of bank statements, as lenders will be able to look at your income and expenses.
- Proof of deposit – this is usually shown through bank statements.
- Proof of address – lenders will require a form of bill dated within the past 3 months that shows the address on your passport or licence, e.g. council tax bill.
- SA302 Form – your end of year tax calculation.
- Certified accounts – these must be certified by a chartered accountant.
- Contracts – if you are on a contract, lenders may want to see proof of this, to show you have a current source of income.
Lenders will perform a credit check and use their own internal credit scoring system to determine their level of risk in lending to you. This will take into account all the information you would have supplied on the application, such as your age, employment history, and any existing financial relationship with the lender.
A main part of this is an external credit history check through one or more of the three main credit check agencies in the UK: Equifax, Experian and TransUnion. It’s always a good idea to check your own credit history and obtain copies of your credit records yourself directly from each of these agencies, to make sure all the details they hold about you are correct:
If you have credit issues it can be harder to find lenders willing to work with you as many will see you as too risky, especially if you are self-employed.
Taking steps to improve your credit score before applying for a mortgage can be beneficial and end up saving you money in the long run. This is because if a lender does offer you a mortgage when you have bad credit, it’s likely that they will offer you a product with an increased interest rate, costing you more in interest payments over time.
Do I need to put down a bigger deposit if I am self-employed?
You’ll be pleased to know that you will not be required to provide a bigger deposit if you are registered as self-employed. If your verified income is within the affordability criteria the lender sets out for all applicants, then you should be able to get the same loan-to-value (LTV) ratio as anyone else.
Most lenders usually require a deposit of 5–10%, therefore your LTV will be 90–95% accordingly. Some mortgage products may need you to supply a larger deposit to qualify for certain deals.
This means that by providing a larger deposit, you can obtain more competitive deals with lower interest rates. In turn, this could save you money in interest over the period of your mortgage, even though you must initially put more money down.
Furthermore, if you for whatever reason don’t fall within the mortgage lender’s criteria, in some cases they may accept your application if you are able to put down a bigger deposit. This shows commitment from yourself and results in a lower LTV ratio, lessening the risk on their part.
How do I choose the best mortgage as a sole trader?
As you know, attitudes and assessment processes adopted by lenders towards self-employed sole traders and their income can vary a great deal from one lender to another.
Therefore, one of the key factors to consider when looking for a mortgage is finding the lender that is best suited to your individual circumstances. One who will consider most positively the length of time you have been trading, how many years’ worth of accounts and SA302s you have, how they work out a mortgage’s affordability and the maximum they will lend, and so on.
It’s important to realise how many more options for mortgage lending there are on the market outside of the high street banks and building societies. In recent years, some mainstream lenders have become more flexible in their lending policies, but there are smaller, specialist lenders who have been catering to the needs of sole traders for some time.
It’s vital to think beyond just the headline interest rate when considering and comparing mortgage deals. You should look into other factors, like:
- Is there an arrangement fee to pay with this mortgage, and how does this compare with other mortgage products from the same lender, or other lenders?
- How do you feel about interest rates? Do you prefer a stable, fixed interest rate, or would you go with a variable tracker or capped rate product, and the accompanying risk of rate increases? As a sole trader you will have access to a variety of mortgage rate types, just like someone in conventional employment would.
- What is the duration of the deal, and will the lender charge you for early repayment if you decide to move your mortgage to another lender, either within or after the agreed term?
If you need expert guidance to determine which lender is best for you, why not reach out today?
Getting the right mortgage advice as a sole trader
Talking to a specialist unlimited mortgage broker can bring you many other advantages beyond simply saving you time and having someone else make arrangements. Our years of experience at The Mortgage Centres in arranging mortgages for sole traders (as well as business partners and company directors) means we know the mortgage market like the back of our hand.
We know how all the individual mortgage lenders operate, their terms and processes, as well as the kinds of mortgage products and deals they are able to offer. We can find not only the right deal for you, but the right lender to suit your circumstances.
On top of this, once we have found the right mortgage for your needs, we can handle your application from start to finish. We will liaise with your lender, your solicitor and any other parties involved, meaning a lot less stress for you and the confidence that everything is being done as it should be.
Reach out today to discuss your situation over a free, no-obligation consultation!
The mortgage rates available to sole traders are no different from rates offered to someone applying for a mortgage in regular employment.
Lenders will not discriminate based on your employment status – their decisions are made entirely on your verified income. The fact that a mortgage should be affordable for you is a lender’s most important consideration, so they’ll check your business accounts to make a proper assessment and offer a mortgage amount based on your net profits.
Some factors that will influence the rate you are offered include your deposit size and credit history. For example, if you have a bad credit history, as well as an average deposit, then you may be offered a slightly higher rate in comparison to someone with a good credit history and an above average deposit.
This is due to the perceived risk by lenders – essentially, the riskier you seem, the more conditions they will impose to offset that risk. In this case that is raising the interest rate.
Finding the best lender can depend on your own circumstances. Different lenders offer different products, and certain lenders may be more suited for sole traders, but you will be pleased to know that as a sole trader your options will be the same as someone who is in conventional employment.
Our team at The Mortgage Centres handle mortgage applications for all kinds of mortgage products, from those available at mainstream lenders and on the high street, through to specialist mortgages for niche markets from lenders who are accustomed to dealing with more complex applications.
Once we understand your individual situation and your needs, we will be able to show you the best lenders for the kinds of mortgage you’re looking for.
Sole Trader vs. Limited Company Mortgages
Arranging a mortgage can become a little more complicated if you run your business as a limited company director rather than a sole trader. Lenders tend to regard the money you take from the company as your base income (in the case of sole traders, this is often all the profits of the business), and their approach to money that you take as dividends or cash left as retained profits within the company can vary greatly from one lender to the next.
The total amount you will be permitted to borrow will vary according to how the lender calculates your income for the purposes of an affordability assessment.
Some lenders offer mortgage products specifically aimed at limited company directors. These can be in the form of personal mortgages (as would be offered to a sole trader or partner in a business), or business mortgages, where the loan is offered to the company rather than the director – one instance being landlords obtaining a Buy-to-Let mortgage on a new property for their portfolio under their business structure.
Fees and interest rates are usually higher than average on these kinds of commercial mortgages, and you may need to agree to other additional conditions. For instance, a limited company director may need to sign a personal guarantee to cover the mortgage debt, making them more responsible for the loan than would normally be the case for a limited liability company.
FAQs: Other considerations as a sole trader
As a sole trader, if you or your accountant submit an annual Self-Assessment year-end tax return to HMRC, this will produce an end of year tax calculation, which they will send to you.
This is the SA302 form – it shows your declared income from all sources and your income tax and National Insurance contributions due for that year. You can get up to four years of SA302 forms from the HMRC in one of three ways:
- If you submit your own tax return using the HMRC Self-Assessment online portal, then sign into your account and print off the relevant SA302s from there.
- If you or your accountant completes your tax return using commercial accounting software, then you or they can print them off via the software.
- If you submit your tax return by post, then you need to contact HMRC directly to request any SA302 forms.
If your mortgage lender will only accept original SA302 forms (as opposed to home-printed copies), or if you submit your tax return by post, or you are not able to print out your forms (if you don’t have a printer), then you can either call the HMRC Self-Assessment helpline on 0300 200 3310, quoting your National Insurance number and Unique Taxpayer Reference (UTR), or write to: Self-Assessment, HM Revenue and Customs, BX9 1AS. Bear in mind that it can take up to two weeks for SA302s to arrive after you have requested them.
Having a bad credit history, or just one or two blemishes on your record, can make things more challenging when applying for a mortgage as a sole trader, but is not impossible. Much might depend on the nature of the adverse credit event and the amount of time since it occurred, but it’s also a matter of knowing where to look.
High street banks and building societies are unlikely to be willing to offer a mortgage to a self-employed sole trader with a bad credit score. However, there are many specialist lenders who are more understanding of individual circumstances and more flexible when it comes to assessing an applicant’s creditworthiness.
This said, a mortgage deal for a sole trader with bad credit is likely to come at a higher rate and may also require a larger deposit.
Phil Scott
Director
About the author
Phil has worked in the financial services industry since 1992, having started with a large insurance company. He went self employed in 1996 as an Independent Financial Adviser before setting up his first company, Needham Market Home Financial in 1999.
After four years, he decided to concentrate solely on mortgages and related insurances, and The Mortgage Centres was born. Since then, Phil has been influential in the opening of several new offices as the business continues to grow.
Qualifications
Financial Planning Certificate: 1,2 & 3
Year Attained: 1992
Certificate in Mortgage Advice and Practice (CEMAP)
Year Attained: 2001
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