Getting a Sole Trader or Partnership Mortgage
If you’re a sole trader, you may be concerned that your employment is hindering your homeownership plans. Fortunately, there are a number of suitable mortgage products on the market, some of which are tailored to specific trading styles.
This guide explains how mortgages for sole traders work, typical lender eligibility requirements, and what to prepare for ahead of submitting an application to ensure you secure the most competitive rates.
Can sole traders get mortgages?While there isn’t a specific type of mortgage that is solely available for sole traders, a wide range of lenders do offer products that are tailored to such job types, and others that specialise in providing home loans for self-employed applicants.
But it’s important you know where to look; some mainstream lenders demand high deposits and multiple years’ of accounts to mitigate the risk you pose being self-employed, whereas specialist lenders can be far more flexible.
How to seek out this type of provider? Speak to a broker with a solid understanding of the needs of sole traders, and a working relationship with both niche and highstreet lenders, who can recommend those best placed to approach.
How long do I need to be a sole trader before I can get a mortgage?Some mortgage providers ask for evidence of up to three years’ worth of accounts before they will consider lending to you, although an increasing number of providers have relaxed their requirements in recent years.
Depending on the nature of your work, the minimum trading period is usually 12 months. If you have a longer history available, your assessment will likely be based on the previous three years.
If you’re a contractor registered as a sole trader, some lenders may be willing to offer you a mortgage after just six months. This is also true of contractors working in construction, and there is a government mortgage scheme, known as a ‘CIS (Construction Industry Scheme) mortgage’, aimed specifically at these types of workers.
What documents do I need for a sole trader mortgage?For a lender to establish your annual income, a documented history of your trading history is required. This allows them to calculate your affordability and helps dictate how much you may be able to borrow.
As a sole trader, you will need to be able to prove how much you’ve earned in previous years. This is usually done by supplying your lender with your SA302s, which can be downloaded via the HMRC portal online after you’ve filed your Self Assessment tax returns.
You will also be required to submit the standard documentation required for any mortgage. This includes proof of address (utility or council tax bills) and photo ID. These are used for verification purposes, and typically don’t have any effect on your mortgage application unless you're unable to supply them or the information doesn’t match.
Lenders may also request to see your bank statements. This allows them to assess your typical monthly outgoings in relation to your income, including any outstanding loans or credit card debt you have, and aids in their affordability calculations.
How do lenders assess sole trader mortgage eligibility?There are a number of other factors lenders will take into account to determine your mortgage eligibility as a sole trader.
Business sustainabilityThe length of time you’ve been trading gives lenders an insight into the sustainability of your employment type. This is important as they want the assurance that, should they lend to you, your business will continue generating sufficient income to be able to cover the repayments.
Mortgage providers are generally more confident lending to applicants that have been trading and generating consistent income over a number of years. This is because they pose less risk than someone who has recently become self-employed and has little proof of their business’s viability.
AffordabilityBefore they agree to lend to you, mortgage providers want reassurance that you will comfortably be able to afford your monthly repayments. While income is an important factor, they are equally interested in your spending habits.
Sole trader income is calculated by reviewing previous years’ SA302s. In some cases, lenders will only ask for your latest tax return, whereas others may calculate your average income using figures from the previous two or three years’ trading.
Lenders will then calculate your debt-to-income (DTI) to determine how comfortable you are with your current debt, and whether an additional payment is affordable. As an example, if you earned an average of £4,000 a month and spent £1,800 on rent, utility bills and additional debts, your DTI would be:
(1800/4000) x 100 = 45
DTI = 45%
The lower your DTI, the less risk you pose to lenders. Generally, a DTI of 35% or less is good, 36 - 49% is acceptable, and 50% or more is poor - meaning your borrowing options may be limited.
Loan-to-value (LTV)Being a sole trader does not directly affect LTV requirements. Regardless of the borrower or mortgage type, having a higher deposit will always put you in better stead because it means a less risky investment for lenders.
For example, an applicant that applies for a 70% LTV mortgage (30% deposit) is likely to have access to more lenders, and therefore more competitive rates, than an applicant requesting a 90% LTV (10% deposit) mortgage.
Generally speaking, 10 - 15% deposit tends to be the standard requirement for a residential mortgage - although lenders may request more if there are other factors counting against you, such as heavily fluctuating income or adverse credit.
Property typeIf you’re looking to purchase a property that is classified as being of a ‘non-standard construction’, you could face difficulty securing a mortgage because lenders consider them riskier ventures.
While this issue isn’t specific to sole traders, it’s advisable to seek expert advice so you don’t waste time approaching unsuitable lenders.
AgeNearly every mortgage provider has age limits for lending. One is a maximum age for taking out a new mortgage (usually 55 - 60), and another for repaying them (around 70 - 85). This can have a direct impact on term length eligibility.
While your age shouldn’t directly lessen your chances of being approved for a mortgage as a sole trader, you could struggle finding a suitable lender that caters to both older borrowers and contractors without the help of a broker.
How much will I be able to borrow for a sole trader mortgage?Most mortgage providers use income multiples as a benchmark to base their lending. Usually, this is around 3.5 - 4.5x your average yearly self-employed income, although some may be more generous.
Using a 3.5x income multiple as an example, for a £200,000 mortgage the applicant(s) would need to earn a minimum of £57,143 a year to be considered by lenders with this lending cap in place.
For a provider with 4.5x income multiple cap, the income requirements are considerably lower: £44,445 per year. Depending on who you approach, some lenders will lend up to 5.5x or even 6x your income - in the right circumstances.
This is when working with a broker can be particularly advantageous; they can recommend lenders with the most flexible lending criteria, and advise you on how to boost your chances of approval.
Can I get a sole trader mortgage if I have bad credit?Many people are under the impression that having bad credit history will prevent them from getting a mortgage, but this isn’t strictly true. There are even specialist bad credit mortgages available - provided you know where to look.
While some lenders can be skeptical about lending to adverse credit customers, many are willing to consider the circumstances surrounding the instance, how long ago it occurred, and how you’ve handled your finances since, before coming to a decision.
The type of bad credit is also a factor; some lenders may be willing to overlook less severe cases, such as the odd late payment or default, whereas repossessions or bankruptcies may be taken a bit more seriously.
Speak to a broker for sole trader mortgage adviceAlthough it’s by no means impossible to secure a mortgage as a sole trader, it’s always a good idea to seek advice if your requirements are a little unique.
The specialist advisors we work with have organised countless self-employed mortgages, and know which lenders are best placed to approach given your circumstances. This means you’ll only ever be matched with those most likely to consider your application.
If you’re a first-time buyer or only recently become a sole trader, you’ll also benefit from the expertise of a broker. Help is just a click away if you want help getting your paperwork in order, or advice on how to boost your chances of approval.
Call us on 02380 980304 or submit an online enquiry, and a member of the team will be in touch to get the ball rolling.
Sole trader mortgage FAQsNavigating the mortgage landscape can be tricky if you’re a sole trader. We’ve done our best to cover the most common questions we receive on the topic, but if yours remains unanswered, feel free to get in touch.
Are sole trader mortgages commercial loans?No, there’s a big distinction between residential and commercial mortgage lending, and it’s important not to confuse the two.
If you’re seeking a mortgage on a property you want to live in and paid for with your sole trader earnings, this would be classed as a residential mortgage based on commercial income, not a commercial mortgage.
Commercial mortgages on the other hand, are specifically used to purchase commercial property or to fund business ventures.
What if my SA302s don’t reflect my true earnings?Mortgage providers usually assess self-employed applicants’ affordability based on the figures in SA302 documents, which show profit after the deduction of business expenses.
This could be problematic if the figure is significantly lower than your gross profit and not necessarily an accurate reflection of your affordability; in this instance, it may be possible for lenders to calculate your affordability based on gross income or total income received.
Can I get a self-certification mortgage?Self-certification or ‘self-cert’ mortgages were specifically designed for the self-employed, and allowed applicants to self-certify how much they earnt in a given year without the need to provide evidence.
For obvious reasons, this type of mortgage was banned in 2014 due to increasing concerns that self-cert borrowers were being accepted for unaffordable mortgages.
Will I have to pay higher rates if I’m a sole trader?If you’re a sole trader it can be more difficult to be accepted by mainstream banks, which can impact how favourable the rates you receive are. This is why you should work with a broker to identify lenders that specialise in self-employed mortgages.
A larger deposit, good affordability and clean credit history (to name just a few) can also help you secure better rates - although this is generally true of any type of borrower or mortgage product.
As long as you approach a suitable lender and meet the eligibility requirements, there’s no reason you shouldn’t qualify for the same, equally competitive mortgage deal as a comparable applicant in permanent, full-time employment.
Because we play by the book we want to tell you that...
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances. The fee is up to 1.5%, but a typical fee is 0.3% of the amount borrowed.