Mortgage Guide for Sole-Traders
As a sole trader, you'd be forgiven for thinking that finding the right mortgage deal is trickier than navigating your way out of Hampton Court Maze.
If you're feeling confused or stressed about the whole thing, relax. We've put together this handy guide to answer all your most common questions about sole trader mortgages.
And when you're ready, we'll guide you through each step of the mortgage process, source the best possible deal for your circumstances, and ensure your application is presented to lenders in the best possible light.
Oh, and we can save you a ton of time and hassle to boot.
What mortgage deals are available to sole traders?
Sole traders have access to the same mainstream mortgage rates, deals and lenders that are available to other types of borrowers, such as employees and company directors for example.
Whilst a small number of lenders do have their own dedicated ranges of self-employed mortgage products, most providers don't differentiate at all.
How much deposit will I need to find?
Many mortgage providers will consider lending at 95% loan to value (LTV), subject to qualification. So it's entirely possible to buy a property with just a 5% deposit.
For the highest LTV deals, many mortgage companies require two or more years of business accounts, finalised and submitted to HMRC. But a few are happy to consider just one year's books, subject to a credit check and affordability assessment.
The simple rule of thumb for LTV is: the higher the deposit, the lower the mortgage interest rate you'll pay.
The type of property you are buying will also affect the maximum LTV available. For example, mortgage providers consider flats and other forms of leasehold property, as inherently riskier security than houses. To compensate, banks and building societies usually require a larger deposit of 15-20%.
How much can I borrow?
Sole traders can typically borrow around 4.5 times single or joint income. Your income is assessed on your net profit declared in your annual self-assessment tax return. In other words, the amount of profit your business made that you paid income tax on.
For a joint application where one partner is employed, gross employed income before tax is added to the sole trader's net profit income to work out the maximum borrowing amount.
How many year's books will I need?
Most high street lenders require a minimum of two years sole trader business accounts. They usually take an average of the last two or three years of net profit when deciding how much you can borrow.
However, a handful of lenders in the market are willing to consider mortgage applications with just one year's accounts from sole traders and other self-employed people.
If net profits have fallen in the most recent year, the lender may request further information to understand why. Understandably, they'll want to ensure the business is viable going forward.
Importantly, they'll probably use the latest year's lower figure to calculate a maximum borrowing amount.
Determining if rising net profits are sustainable
Similarly, if the most recent year shows a large increase in net profit, the lender could seek confirmation from your accountant that it's not simply due to one-off factors.
Is your accountant minimising net profit?
If your accountant usually minimises your business net profit (and thus your tax burden) by maximising allowances and expenses, ensure you notify them well in advance of your property purchase plans, so they can maximise profits where possible.
What income criteria do lenders use for sole traders?
Every bank, building society or niche lender will have its own eligibility criteria for sole traders. But generally, they'll want to see verifiable evidence of:
A stable or growing income capable of servicing the mortgage loan.
A decent credit history (though many lenders will consider applicants with adverse credit on their file).
Manageable or low levels of credit commitments (car finance, credit cards, personal loans child maintenance etc), if any.
Good financial management. In other words, no obvious signs of financial distress such as a recent payday loan or regular overdraft usage.
Can I get a sole trader mortgage with bad credit?
The short answer is yes. Many mortgage providers are happy to consider applicants with mild adverse credit on their file. Especially if the credit impairment is more than two or three years old.
More recent adverse such as CCJs and defaults is acceptable to some lenders, as long as they are satisfied, limited in number (usually 1 or 2 max) and don't exceed a maximum combined value (£500 is common).
For very poor credit, like bankruptcy or an IVA, we may still be able to help, but the devil is in the detail. Some lenders need the insolvency to have been discharged/satisfied at least 6 years ago. Others require 3 or 4 years to have passed. And a tiny minority will consider cases after 1 or 2 years.
Mortgage affordability explained
One of the first questions we get asked when someone makes a mortgage enquiry with us is: "how much can I borrow?"
The answer is...it depends.
All mortgage providers have to consider a range of factors including, but not limited to:
Sole trader income (net profit before tax)
Trading performance and duration
Credit score and history
Ongoing credit commitments
Other discretionary outgoings
Whether there are any financial dependents (children and/or elderly relatives)
Other income sources like pension or rental income
The age of the applicant(s).
The mortgage term
The tenure of the property being bought. Freehold, leasehold, etc.
Should a lender deem the mortgage is unaffordable, that doesn't necessarily mean it's the end of the road. The deal could just need a little tweaking. For example, by increasing your deposit size a little to reduce the loan amount, or by increasing the mortgage term.
How to improve your chances of getting a sole trader mortgage
Here's a few ideas that can help maximise your chances of getting accepted for a mortgage:
If you can, pay off any credit cards, personal loans or overdrafts in advance. This will show lenders your finances are in good shape.
Check your credit file and report any incorrect information to the appropriate credit reporting agency (Equifax, Experian etc).
Let your accountant know about your mortgage plans well in advance, so he can prepare your accounts as soon as possible after April 5th.
Ask your accountant to advise if there's any potential to maximise your net profit before the tax year finishes.
As an independent, whole-of-market, self employed mortgage broker, we'll quickly source the most suitable deal for your particular circumstances.
We have access to thousands of mortgage products from a huge panel of mainstream and niche lenders. If you'd like to discuss your mortgage options, call 07904 158 233 or email hello@saltwoodfinance.co.uk.