Mortgage as a Sole Trader

Can I get a mortgage if I’m a sole trader?

Absolutely. Most of the mortgages we arrange actually are for sole traders. If you’ve submitted your first set of accounts and you have a deposit, whether that’s coming from savings, a gift, or if it’s equity in your property, there’s a good chance that we’re going to be able to get you a mortgage of some degree.

How long do I need to be a sole trader before I can get a mortgage?

As long as you’ve been trading as a sole trader for 12 months and you’ve submitted one set of accounts to HMRC, there will be lenders out there that will accept your application.

You need to be mindful, though. You only submit your income to HMRC once a year in April. If you started trading in December 2023 and you come to us in December 2024, then your one set of accounts would have been submitted in April 2024.

If that’s the case, you only would have submitted the income for January, February and March, and that’s only one quarter’s worth of business. Although you’ve been trading for a year and you’ve got one set of accounts, you’ve really only shown HMRC what you’ve earned that quarter.

It’s good to tie your accounts up with the financial year if possible. If you’re moving from employment to self-employment and you can do it in April, that’s going to make your life a lot easier. You will be able to secure a decent-sized mortgage with your self-employed income much sooner than if you started part way through a year.

What documents do I need to prove my income?

You’ll need the key documents we talk about all the time, like bank statements, identification and proof of deposit. From a sole trader’s income perspective, you’re going to need your latest two years’ SA302 documents.

These are also known as tax calculations or tax computations. You can download them from HMRC, or your accountant can generate a copy for you. It’s almost like a bill from HMRC.

On submission of your annual accounts, they generate a breakdown of your income, profits, and taxation due. If you’ve only been trading for one year, clearly you’re only going to have one of these, and that’s all you need. But if you’ve been trading for two, you’re going to need both years’ documents.

On top of that, you’re also going to need your latest two-year tax year overview documents (or one if you’ve been trading for one year). Again, you can download these from the HMRC portal. They’re going to correspond with the SA302.

If that’s the bill, this is almost like a receipt. It shows what tax is outstanding and what’s being paid. They go hand in hand.

How does the mortgage process differ between a sole trader and a limited company?

If anything, the process is actually slightly easier as a sole trader versus a limited company. There are fewer documents involved, because a limited company is a separate entity. If you remove that, less evidence is required for a mortgage lender.

There’s less variation in how they calculate your affordability, as well. A lot of self-employed people will be interested in how much they can borrow – so how much is going into the affordability calculator. As a sole trader, there are fewer potential outcomes than if you’re a limited company.

Other than the income being verified, and the figure you are using towards that application, the rest of the process is exactly the same.

How much can I borrow as a sole trader, and do I need to put down a bigger deposit?

That question comes up a lot with regards to self-employment. The borrowing amounts are going to be similar, whether you’re employed, self-employed or contracting. However you earn your money, the borrowing amounts are very similar across the board.

What differs is the way that the lender arrives at the income figure they put into the calculator. As a sole trader, the most common approach is for a lender to average the latest two years of your profits.

Let’s say you earned £20,000 in year one and £30,000 grand in year two. They’d add them together and use £25,000 as the average for the affordability calculator. If your income is on a downward trend from year to year as a sole trader, they’d take the most recent year rather than average it out.

Some lenders will take the latest year in isolation. It’s your broker’s job to decipher the lender and the approach that suits your circumstances best.

Can I still get a mortgage as a sole trader if I have bad credit?

It’s rare that someone’s credit is the deal breaker. But if it’s really, really bad and very recent, we might not be able to place your business anywhere.

Generally, though, it could mean a slightly higher rate with a specialist lender, and you might need a larger deposit. Some lenders will give you a mortgage based on your credit, but instead of 10%, you will need a 15% deposit. An impaired credit situation isn’t a deal breaker in itself.

Can I get a Buy to Let mortgage as a sole trader?

Yes. Buy to let mortgages are based on the rental income from the property. That’s going to drive affordability, so your personal income isn’t as crucial as it is for your personal mortgage.

Some lenders will have a minimum income requirement where you might need to personally earn £25,000 before you can get a mortgage on a Buy to Let basis. But other lenders have no minimum income requirements.

Your current setup will influence which lender your broker will place you with. But if you’ve got a deposit and you’re a sole trader, you should be fine to start investing in property.

How does the remortgaging process work as someone who is a sole trader?

Remortgaging for sole traders is no different from what we’ve already discussed. It will, of course, differ for anyone who has switched from being an employee or a different type of employment to a sole trader since they last completed a mortgage application.

Some people may have bought a property when they were employed and since become a sole trader. The situation for them is going to be completely different this time around. People do need to bear in mind the time frames we’ve discussed and all the changes that will come as a result of moving to self-employment.

But don’t forget, if you’ve already got a mortgage, your existing lender will usually offer you a new deal when your current rate comes to an end. That’s not normally going to require any income assessment. If you’re not looking to change the lender, the borrowing amount or the term of your mortgage, we can conduct a ‘product switch’ with your existing lender.

That’s a really easy way to make sure you’re getting a good deal without having to go through the whole income verification and assessment process.

How do I apply for a mortgage as a sole trader?

The best way to apply for a mortgage as a sole trader is to hop on to Google and type in Henchurch Lane Financial Services. Find our number and speak to one of our specialist self-employed brokers, who are probably the most knowledgeable brokers in the country when it comes to self-employment.

We do hundreds and hundreds of self-employed mortgages every year. They are complex and our knowledge is market leading. So if you’ve got any qualms or concerns about speaking to a broker who isn’t necessarily versed in that situation, seek out someone who is – us.

Is there anything else we need to consider here if you are a sole trader looking for a mortgage?

If you’re a sole trader looking for a mortgage, have a chat with a broker. That’s the first point of call. Mortgages aren’t straightforward on an employed basis, let alone a sole trader basis.

More than ever, preparation is key. Sometimes a decision you make could take a year to actually come into practice with regards to your accounts or income changes. You need to be mindful of tying that in with your fixed rate deal or your short, medium, and long-term goals.

We speak to people all the time that are planning on going self-employed over the next couple of years, and just run through scenarios with them. We’re not trying to manipulate anybody’s choices, but to make sure they’re not tripping themselves up.

It’s always good to talk through that with a broker and give yourself a roadmap to be comfortable in the decisions that you’re making.

YOUR HOME 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.