Mortgages for sole traders and partnerships
Published 15th August 2017
Many find getting a mortgage as a self-employed applicant far more difficult than it needs to be! Self-employed mortgage lenders will cater for sole-traders, partnerships and Limited company directors, as well as the various other less common company ownership structures, but all do so in various ways. Some favour and have more flexible criteria for sole traders and partnerships, others for Ltd companies.
Establishing the best lender will depend on the criteria laid out in the rest of this article, which should provide a greater understanding of what to look for. The main things you and your advisor will need is the ability to read accounts, and a knowledge of the market to ensure you get the best deal, terms, and the loan you want at a price you can afford.
How long do you need to be a sole trader before getting a mortgage?
For a lender to establish a self-employed borrower’s annual income, a proven and well documented history of trading is required. In times pre-regulation (and credit crunch) it was possible for borrowers to self-certify their income and tell the lender what they earned, rather than prove affordability. This caused many to borrow far more than they could feasibly afford and was a contributing factor to the downfall of the market.
Thankfully now UK regulation prevents such loans, and all borrowers are required to produce evidence of income and affordability.
- Sole-trader income requirements for a mortgage: If you’re a sole trader getting a mortgage is the same process and requires the same evidence as if you’re a partnership, with a minimum of 12 months trading.
- Partnership mortgage income requirements: 12 months as above
- Contractors: If you are a sole-trader contractor who has not yet fulfilled 12 months trading, it is possible to use your day-rate income
- CIS scheme: As with contractors, it’s possible to borrow based on your remittance slips and gross income as if you were employed, from just 6 months of trading.
What self-employed documents do mortgage lenders ask for?
All sole traders and partnerships have the common tax year end date in line with the UK Financial Tax year (ending April 5th), and lending is almost always based on your annual accounts / tax returns filed from this date. Most sole traders and partnerships run their accounts in one the following ways:
- You may run your own accounts, keeping logs of income and outgoings and filing your own self-assessment tax returns before January the following year,
- You may have a book keeper who helps with your figures and provides info for you to complete your own self-assessment,
- You may have an appropriately qualified account who runs your accounts and submits your self-assessment on your behalf.
It’s not essential to have an accountant, nor is it a requirement for lending purposes either, many just find it easier having someone look after the figures on their behalf. If you have accounts then lenders can use these, so long as they are drawn up and submitted to HMRC by a certified accountant with the necessary recognised qualifications.
If you don’t have a certified accountant drawing up your books, then you’ll need your self-assessment tax year overview, and SA302 documents – these outline the total annual turnover, expenses, and net income received.
Sole-trader mortgage applications: It is the “total income received” figure from your SA302 that lenders use to calculate annual income and thus, affordability. If using sole trader accounts for the mortgage then it’s the “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”.
The factors impacting sole trader / partnership mortgages
- Loan to value
If the loan is deemed affordable, then the amount of deposit required is almost always the same for sole trader and partnerships as it is for employed applicants. The exception here is when some lenders offer more flexible underwriting for those who have circumstances that fall outside of standard lending criteria, and these products demand a higher deposit than for other deals offered to those meeting the standard criteria.
- Sole trader and partnership mortgage affordability
We have written about self-employed affordability extensively in other articles, so to keep it brief:
- Trading history
Most lenders require 3 years trading history before they will consider the applicant’s income stable enough to lend on. Some are happy with 2 years, and others will accept sole-traders and partnerships who have only been running for 12 months.
- Sole-trader mortgage income calculation
Most lenders will calculate usable income based on an average of the last 3 years trading history. Some are happy with an average of the last 2 years, and others accept the most recent years trading income.
- Lending generosity
Every lender varies in the way they calculate sole-trader incomes and also in the amount are prepared to lend based on these incomes. Typically, 3.5x income is an average benchmark, with some lending 4x and even up to 5x income for certain borrowers. It is possible to exceed 5x income for those refinancing and looking to borrow more money, through some specialist secured loan/second charge mortgage lenders.Sole trader mortgage calculator: Max loan = (Net profit or “total income received”) x 5
Partnership mortgage calculator: Max loan = (share of net profit or “total income received”) x5
Ltd company mortgage calculator: Max loan = (share of net profit or salary + dividends) x 5
- Adverse Credit
Sole-traders and partnership borrowers are also eligible for adverse credit mortgages, in much the same way as employed borrowers are. The only difference is when the company has only been trading for 12 months, as there are only a handful of bad credit lenders accepting self-employed borrowers without 3 years’ accounts (although they do exist).For more on this please visit our adverse credit pages here, or make an enquiry and we’ll hand you to the self-employed adverse credit specialist
Are you a Limited company director looking for a mortgage?
The rules, criteria, calculations, and evidence required is slightly different. Visit our LTD company pages for specific info and advice.
Sole trader vs limited company mortgages
If you aren’t sure if you need a sole-trader or a ltd company mortgage then you’re probably best to speak to an advisor, as it may be an especially complex application.
If you are a sole trader then you’ll have to apply as such and wouldn’t be able to make an application as a Ltd company. However, as a LTD company director, it is possible to apply using your personal income as declared in April to HMRC in the same way a sole trader would, before the end of your company tax year. This would mean you’d use your self-assessment tax return to evidence your income, not your company accounts. This is because every self-employed person has their own personal tax return (Self-assessment, which produces the SA302 document lenders use), and those who are a Ltd company will also have company accounts and tax return.
As Ltd company tax years can (and often do) end differently to personal tax years (by law of averages companies aren’t set up at various times in the year and most NOT in April), exactly when you apply for the mortgage can impact which lender you go to.
For example: Let’s say your company trading year end is September, and you have had a great year so far, and want to reward yourself by moving to a new house and taking a larger mortgage. You decide to do so in May, which is after your personal financial year end, before your company year end. Lenders who only lend based on the company accounts will consider the previous years’ figures, or require you to wait until the full accounts are drawn up in September. There are some lenders however, who will lend based on the figures you submit to HMRC on your self-assessment, which if they are higher than the previous set of accounts, will mean you may be able to borrow far more.
Sole trader commercial mortgages
Commercial mortgages are borrowings made by companies, on company property or to buy or fund a company itself. This may be to buy a business or rental property, but is not to be confused with buying a personal property made by someone who owns a company – this is a personal mortgage using commercial income.
Sole trader mortgage rates
The best mortgages for sole traders are based more on criteria than rate, lending to those whom fall outside standard criteria for most self-employed mortgage lenders.
For the most part there’s no such thing as a “sole trader mortgage”, only a normal mortgage that self-employed applicant may or may not be eligible for, and employed applicants would also qualify for these products. The exception to this is with several key self-employed specialist lenders who offer products tailored specifically to sole-traders, partnerships, contractors, and Ltd company directors – these tend to be for the more specialist scenarios, that lenders deem more of a risk and therefore sole trader mortgage interest may be slightly higher rate.
Sole trader mortgage lenders
All lenders offering sole trader mortgages also accept partnerships and Ltd company directors, the only difference is the way in which they all calculate the acceptable incomes, as outlined above. For example, Halifax sole trader mortgages are looked at differently to how they consider partnerships and Ltd companies. This is the same with Nationwide, Santander, Barclays and so on.
Establishing the lender that’s best for you depends entirely on your individual circumstances, and the only way to do this is to speak to the expert who understands self-employed accounts and knows the market inside out.
Sole trader mortgage brokers
Because getting a mortgage as a sole trader can be tricky, if you are looking for the best mortgage then using a broker who can recommend products from the whole market is important, even more so when you are a sole trader, partnership or ltd company that has traded for less than 3 years or looking to borrow based on the most recent years trading figures.
Make an enquiry and we will put you in touch with the expert who arranges these mortgages every day.
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