Self-Employed (Sole Trader)
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Sole Trader Mortgages
Richard Campo runs us through mortgages for sole traders.
Can I get a mortgage if I’m a sole trader? How does it all work?
The short answer is yes, of course you can. There are three main types of self-employment: sole trader, which we’re going to focus on here, or you could be set up as a limited company or even part of an LLP. If the latter two apply, this is probably not the best podcast for you. But if you’re a sole trader you’ll get all the details you need.
Getting a mortgage is relatively straightforward. Typically a sole trader is a tradesperson like an electrician or plumber – but not always. Generally if your turnover is below a certain level it makes sense to operate as a sole trader rather than a limited company.
To assess you, banks look at your profit and loss account, which either your accountant does for you or you do yourself. Primarily what we’re looking at is your net profit – your income less any expenses.
How long do I need to be a sole trader before I can get a mortgage?
The minimum trading period is one year, so if you’ve got a year’s accounts behind you then you can get a mortgage. Not all banks offer that, however – in fact 90% of lenders will need two years’ trading or more. You’ll have access to all the banks in the UK if you’ve been trading for three years plus.
In terms of assessing your accounts, several banks will simply take your last year’s figures into account. The majority of the high street banks will average the last two years – but if your current year is lower than the average, they’ll only use the current year. The banks who take three years will do the same.
Now, if you’ve been trading for five years and just had a really good year, some banks will just take your most recent year. So there can be some advantages to choosing certain banks depending upon how much you want to borrow. If you want to borrow quite a modest sum this may not matter whatsoever.
But if you’re looking to move house or get the maximum mortgage for whatever reason, it will make a difference. Let’s say you made £100,000 last year and £50,000 the year before, some banks will work on your income as £50,000, some will be £75,000 and some will treat it as £100,000. Then, as they will multiply that by four or five to calculate your borrowing, you can see it makes a big difference.
What documents do I need to prove my income as a sole trader?
The most important thing from a mortgage broker’s perspective is something called your SA302 – the confirmation back from HMRC that they agree with your figures.
You can also supply the preceding form to this, which a lot of people do online – it’s called the SA100. Some banks want both of those documents plus your tax overview. If you only have one source of income it’s quite straightforward, but if you have rental income or other forms of income the SA302 is really important because it gives more detail.
Banks and brokers will also want to see your personal bank statements, proof of deposit, ID and proof address.
On the back of the Covid pandemic, some banks will want to see business bank statements and they might want to see if you took a bounceback loan or not. Most banks are now comfortable with grants, loans etc. For a certain period they were simply declining applications if people took assistance, but that’s no longer the case.
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How does the mortgage process differ between a sole trader and a limited company?
The process is no different. What a bank always wants to talk about are three Cs – capacity, collateral and commitment. They want to check you can afford what you’re doing, what property they are lending on and your past credit performance.
For a sole trader there’s actually less documentation involved compared with a limited company. If you do run a limited company or are thinking of converting, take a look on our website as we have another podcast on this.
How much can I borrow as a sole trader? Do I need to put down a bigger deposit?
Theoretically, you can get a mortgage with a 5% deposit subject to your income and your profile. Being a sole trader doesn’t mean you need a bigger deposit. There are a few banks that might want a 25% deposit, but they’re few and far between. The majority of lenders are quite happy to lend up to 95% as long as you can afford the repayments.
In terms of how much you can borrow, if your net profit is above £75,000 you can borrow up to five and a half times your income. You would need a minimum of a 15% deposit to get into that bracket.
If your income or deposit is lower, then you can borrow a bit less. With a 5% deposit, most banks will offer you about four and a half times your income.
What if I have bad credit, can I still get a mortgage as a sole trader?
You’re not disadvantaged in being a sole trader. The same rules apply to everybody. Generally if you had three credit blips or less of under £250, all the high street banks will deal with you.
If you’ve had more than three blips, or one is above £250, things do get more difficult. Banks need a specific licence to lend to people with adverse credit. It also depends on how recent the issue was – if it was more than 12 months ago and under £1,000 most lenders are willing to help you with that. Larger than that, it really is case by case and you will need a specialist lender.
Even unsatisfied CCJs of over £5000 are allowed with some mortgage providers. Again this is slightly tied to the Covid point – it’s been a tricky period for a lot of people.
How do I apply for a mortgage as a sole trader?
Essentially, talk to a broker as soon as possible. The bank you approach can make a big difference, depending on your situation.
You might have made a loss in the last couple of years because of Covid, or you have had a couple of credit issues. Whatever the situation, rather than go to the high street and have a rough experience, we can help you very quickly. We know our way around this, how to present things and which banks to talk to, particularly if you’re a sole trader.
Plus, you’re solely responsible for your income – so you’ve got better things to do with your time than mess around comparing mortgages. We can do this in a flexible way that suits you, and talk to you in the evenings or at weekends. Whatever works for you.
On top of that, brokers do get access to exclusive products and lenders are a bit more flexible with us too. It’s often cheaper to come through a broker, so it’s a no-brainer. Don’t take my word for it – check our reviews, have a chat with us and see if we can’t get you a better outcome.
Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. There may be a fee for mortgage advice, however the precise amount will depend on your circumstances. If a fee is charged, a typical fee is £495.