Mortgage as a Sole Trader
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Mortgage as a Sole Trader
Kelly explains how mortgages work for sole traders.
Can I get a mortgage if I’m a sole trader?
Yes. I think there’s a common misconception with self-employed sole traders that it’s difficult to get a mortgage, or that lenders don’t like to lend to you and it’s simply not the case.
There may be different criteria and lenders assess your income differently when they’re determining what they will lend to you, but you absolutely could get a mortgage as a sole trader.
How long do I need to be a sole trader before I can get a mortgage?
The minimum time is one year. The lenders will ask for at least one year’s worth of sole trader tax returns and tax accounts to prove what you have earned for that period. However, only a small handful of lenders will lend to you with one year’s accounts as the majority of lenders want to see a two year track record.
That’s mostly to prove the sustainability of your income – that you haven’t just had one very good year where the following year wouldn’t necessarily be the same.
What documents do I need to prove my income?
As a self-employed sole trader, you will have to submit an annual tax return. Whether you do that yourself or your accountant or bookkeeper does that, you need to submit the return. Once you have submitted those accounts you will get what’s called a tax calculation (previously knows as an SA302) and it’s that document that the lender will require as it will show your profit from your sole trader income. They will also ask for a corresponding document called a tax overview, which is essentially just a breakdown of the tax you have to pay for that year’s worth of income.
How does the mortgage process differ between a sole trader and a limited company?
It’s quite similar. Again, there’s a common misconception around this. Directors of a limited company are technically employed by their own company, so they often think they are classed as employed and they need pay slips or P60s to prove income, but that isn’t the case.
Whether you’re a sole trader or a limited company director, lenders are going to assess your tax calculations for your affordability. The tax calculations just look very different.
As a sole trader, you process the whole turnover for the year and offset any deductions. It’s the net profit on the tax calculations (after your deductions) that lenders use for affordability. A limited company director takes their income differently – as a salary and sometimes dividends as well. It’s the salary and dividends combined that the lender will use for affordability.
So in terms of the documents a lender would require, they’re the same, but how they calculate your income is different depending on how you are set up as a self-employed person.
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How much can I borrow as a sole trader and do I need to put down a bigger deposit?
I think affordability is the main thing that differs for the lenders here, not necessarily a bigger deposit.A very small handful of lenders have restrictions with regards to loan to value for self-employed people, but now a few years post COVID, that’s not necessarily the case. As long as the lenders could see a consistent level of income on your tax calculations, there’s no reason they would require a bigger deposit.
The amount you could borrow is always based on the lenders’ affordability calculations, in which they assess your net profit income. The majority of lenders will take an average of the last two years’ net profits to balance it out. They tend to lend around four and a half times your annual income. As always, they will factor in any loans, credit cards, childcare costs and any other credit commitments before they give you a maximum borrowing amount. It’s no different to being employed in how they assess that.
What if I have bad credit? Can I still get a mortgage as a sole trader?
Absolutely, credit is a separate part of the underwriting criteria. If you have credit issues or previous adverse credit, it will always be factored in, but the lenders won’t necessarily penalise you for being a sole trader. They will assess credit in the same way whether you are employed, a sole trader or a limited company director.
Can I get a Buy to Let mortgage as a sole trader?
The criteria surrounding a Buy to Let mortgage is different to residential whether you are employed or a sole trader, so it doesn’t have too much impact on it. The majority of lenders will have a minimum income requirement for a Buy to Let mortgage, and a lot will want you to be an owner-occupier. They need you to own your residential property before buying investment properties to prove you have a track record of paying a mortgage. Provided you tick those boxes they won’t penalise you for being employed, a sole trader or a limited company director.
How does the remortgaging process work for a sole trader?
We would require different documents for a sole trader than if you were employed, and the same criteria would apply. Again, there’s a handful of lenders that will allow you to be a sole trader for one year, whereas the majority will require two years.
Provided you meet that minimum sole trader time and the usual credit scoring and affordability, there are no differences. It’s just the documents that you would have to provide us that would differ.
How do I apply for a mortgage as a sole trader?
Again, it would just be a case of ensuring we get the right documents. It’s sometimes the most difficult part of applying for a mortgage as a sole trader, as sometimes it’s not easy to navigate the HMRC system to download the documents required.
But in terms of how we work, booking appointments and applying for the mortgage is the same as for anyone.
The main thing we come up against is not being able to get the documents that the lenders need. There are no other documents that we could view if we don’t have the tax calculation and tax overview. We make sure we have the right documents and figures upfront to be advise on the most suitable mortgage.
What else do we need to know about getting a mortgage as a sole trader?
One thing that does come up quite regularly for sole traders is that it’s you as a person who is self-employed, you’re not a separate company entity. A lot of people might take a van or company car for business purposess, but as a sole trader these credit commitments are in your personal name, not a company name.
So it’s very important to declare these commitments and expenses to your mortgage advisor, because lenders will still factor this in for affordability. Your accountant would deduct those costs from your net profits as a business expense, but lenders are still going to factor it in as a personal commitment. Even if you think it doesn’t count towards the mortgage or you don’t need to declare it, I would advise you to tell your advisor.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
SOME BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.