Sole trader mortgages

Many sole traders may be wondering how to get a sole trader mortgage and if there are any factors that may affect them. Getting a sole trader mortgage should be a somewhat straightforward process but for many buyers, this hasn’t been the case and this is usually because they have been given bad advice or they haven’t had their sole trader mortgage application presented to the right mortgage lender in the right format.

Self-employed mortgage lenders deal with sole trader mortgages but there may be some self-employed mortgage lenders who are more suited to sole trader mortgages than one which may be more suited to bad credit self-employed mortgages, mortgages for doctors or director mortgages.

Getting the right fit when applying for a sole trader mortgage can be the difference between getting a mortgage and being rejected for a mortgage.

What is the main factor when getting a sole trader mortgage?

When getting a sole trader mortgage the main factor will be how long you have been a sole trader for.

Most sole trader mortgage lenders will expect to see that you have been a sole trader for at least 3 years and can present at least 3 years worth of accounts so they can work out your mortgage affordability.

There are however sole trader mortgage lenders or partnership mortgage lenders that will accept less as long as there are at least 12 months worth of accounts.

If you are a contractor you may not need to show a minimum 12 months of account but rather six through schemes such as the construction industry scheme which is for contractors working in the construction industry.

For other contractors, the mortgage lender may be fine using their day rate to calculate their mortgage affordability.

The sole trader mortgage lenders may also calculate affordability based on the gross income received rather than the net income. This will allow sole traders to benefit from a bigger mortgage size based on the mortgage lenders mortgage multiples.

What documents do you need for a sole trader mortgage?

Getting a sole trader mortgage is possible but most mortgage lenders may want to see your accounts for 3 years at the very minimum although there may be mortgage lenders willing to offer a sole trader mortgage with less than 3 years worth of accounts but at least 12 months.

The documents you may need as a self -employed mortgage include:

Your P60

Your SA302 tax calculation form

Your company accounts if you work through a limited company

You may find using the services of a mortgage broker who has experience dealing with self-employed borrowers.

Other considerations a mortgage lender may take into account when offering a sole trader mortgage to a self-employed are:

The Trading style: are you drawing a salary from a company or do you have a claim over a share of retained profits. These could make a significant difference in how much you may be able to borrow.

Your experience: how long have you been self-employed and what is your working history.

The key document most sole trader mortgage lenders will use to calculate your eligibility or how much you can afford is your SA302 tax calculation form. This will outline the total annual turnover, expenses, and net income received.

When looking at your SA302 tax calculation form mortgage lenders will look for different figures based on the type of mortgage you are after:

Sole-trader mortgage applications:

The sole trader mortgage lender will look at the “total income received” figure from your SA302 and use this to calculate your annual income.

If you are using your sole trader accounts the mortgage lender will be looking forthe “net profit” or “drawings” figure.

Partnership mortgage applications:

It is the same figure on your personal SA302, or if using the partnership accounts for the mortgage then it’s your share of the “net profit” or “drawings”.

What affects your eligibility for a sole trader mortgage?

The factors which affect your affordability for a sole trader mortgage include:

Your mortgage deposit:

Putting down a sizeable mortgage deposit will reduce the loan to value rate on the mortgage and you may find a mortgage lender is willing to lend to you on that basis. Sole trader mortgage lenders may be more willing to offer a mortgage to a borrower which provides them with a 75% loan to value rate than one who provides them with a 90% loan to value rate.

Trading history

Your trading history is a big factor which may affect your sole trader mortgage affordability. Most sole trader mortgage lenders will want to see that you have had at least 3 years worth of trading history although under the right circumstances you may find mortgage lenders who are able to offer you a mortgage if you have more than 12 months worth of trading history and accounts.

Type of mortgage lender or product

Different mortgage lenders will have a different risk exposure which they are willing to take and this will reflect in the mortgage multiples which they offer. A mortgage lender offering a mortgage multiple of 3 will be worse off to you in regards to how much you may be able to borrow than a mortgage lender who is offering a mortgage multiple of 6.

If you are a limited company director looking to get a mortgage the requirements are somewhat similar but may differ on some key points.

Can you get a sole trader mortgage with bad credit?

Getting a mortgage as a sole trader with bad credit may be difficult as mortgage lenders may usually want to lend to borrowers who have a good credit score and have shown a good repayment history on all their previous debts.

There are however mortgage lenders who will offer a sole trader mortgage to a borrower depending on what type of bad credit was and what the circumstances were.

If it was a CCJ which was satisfied and is a certain age then some mortgage lenders may be willing to lend. Other mortgage lenders may lend if the CCJ was a maximum amount.

When looking to get a mortgage with bad credit the requirements from different mortgage lenders will differ and a bad credit mortgage broker may be able to assist you in getting a sole trader mortgage.

Bad credit when considering a sole trader mortgage could include:

A CCJ

An IVA

A debt management plan

A default

A bankruptcy

A home reposession

Government help for sole traders?

If you are an eligible first-time buyer or home mover then you may be able to get a mortgage with a government scheme. You can use the scheme as a sole trader or with multiple people but the scheme rules will still apply.

If you are a first-time buyer then you will likely need to sign a first-time buyer declaration

Example if the maximum property price on a property is £500,000 then even if there were two of you the maximum property price the government scheme will accept is £500,000.

Some of the Government schemes you may be able to use with a sole trader mortgage include:

 

  • Lifetime ISA– gives you a government bonus of £1,000 if you save a maximum £4,000 a year.
  • Help to buy ISA– gives a maximum bonus us £3,000 if you save the maximum allowed of £12,000. Before you get either you should consider which is better. Lifetime ISA vs Help to buy ISA.
  • Help to buy equity loan– gives you up to 40% as a 5-year interest-free equity loan. You begin to pay interest at 1.75 % after the fifth year and 1% plus RPI for every year thereafter.
  • Shared ownership– You can buy between 25% to 75% of the property initially with a shared ownership mortgage and then buy more using a staircasing mortgage.
  • Armed forces help to buy– similar to the help to buy equity loan but specific for the armed forces personnel giving them an increased chance of acceptance.
  • Rent to buy– This is the right to buy scheme on which this guide is currently discussing. A different marketing name is just used. Watch out for this when shopping to avoid missing out on eligible properties due to confusion.
  • Right to buy– allows you to buy your home at a discount price.
  • Preserved right to buy– same as above.
  • Right to acquire– similar to the above.

 

Depending on where you live, you may also be able to take advantage of home buying schemes provided by your local council. Example: In Norwich, the local councils provide the Norwich home options scheme.

Commercial mortgages for sole traders

Getting a commercial mortgage as a sole trader could be very possible. Commercial property is usually defined as any property where any commercial activity takes place.

Sole trader mortgage rates

The rates for sole trader mortgages will differ between mortgage lenders and the rate you may be offered will usually be based on your individual circumstances.

Getting a Sole trader mortgage

If you need to get a sole trader mortgage you should consider getting in touch with a mortgage broker who may be able to assist you further. A mortgage broker may be able to help you navigate the sole trader mortgage market.

How to apply for a sole trader mortgage?

To apply for a sole trader mortgage you may want to first contact a mortgage broker.

Mortgage brokers are important as they can access sole trader mortgage products from across the whole of the market in some cases. This could be over 11,000 single-parent mortgage products. This may have some advantages than going directly to a mortgage lender.

A mortgage broker will look to understand your financial circumstances and then provide recommendations on which sole trader mortgage products may be suitable for you.

After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle. This will allow you to shop for your home easier as more estate agents and sellers may take you seriously. Once you have found a home you want to buy the mortgage broker will then look to get you a mortgage offer.

This will come with a key facts illustration document which details out the features of your mortgage including how much you will pay per month if there are any limits such as early repayment fees, or annual overpayment limits.

If you are happy with everything you can then go on to secure your sole trader mortgage with the help of a conveyancer.

What to do if you have been rejected for a sole trader mortgage?

If you have been rejected for a sole trader mortgage the first thing you should know is that it isn’t the end of the world and you may still be eligible for a mortgage with a different single mortgage lender.

Your mortgage broker will look to find out why the mortgage lenders have rejected you for a sole trader mortgage and what you can look to do to increase your mortgage affordability before applying for a mortgage again.

It may be the case that you aren’t eligible for a mortgage at the moment and may need to save more or find a co-buyer to reduce how long it takes you to get on the property ladder but you may want to first consult your mortgage broker or the mortgage lender to get a full understanding of why you were declined for a mortgage.

Can sole traders get a mortgage?

Yes, sole traders can get a mortgage. Get in touch with a mortgage broker who deals with sole trader mortgage applications

How many years do you have to be self-employed to get a mortgage?

Usually, most self-employed mortgage lenders will expect you to be employed for at least 3 years but there are self-employed mortgage lenders who will accept accounts of 12 months plus.

Can I get a mortgage without proof of income?

There are mortgages known as self-cert mortgages which allow you to self certify your income. These mortgages aren’t available in the UK but you can still find them in Mainland Europe. This mortgages can be risky and you may be at much risk of losing your home through a home repossession.

Use a mortgage broker for your mortgage in principle

You may want to use an independent mortgage broker to help you get a mortgage on your new home.

Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases.

This could be over 11,000 mortgage products. This may have some advantages rather than going directly to a mortgage lender.

A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you based on your mortgage affordability.

After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle

This will allow you to shop for your home as more estate agents and sellers may take you seriously and it will also give you confidence that your mortgage is indeed a possibility before you make a full mortgage application. 

Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.

This will come with a key facts illustration document that details the features of your mortgage including how much you will pay per month.

It will also contain information on if there are any limits such as early repayment fees, or annual overpayment limits.

If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.

Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it.

They will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer, and set a completion date with the seller or their conveyancer.

This will then bring an end to the conveyancing process, at which point you will receive the keys to the house and move in.

If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.

You can also contact the debt charity “Step Change” if you are in debt and need help.

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.