As the economy changes, lots more people are turning to self-employment, which is on the increase in the UK. As such, when you’re registered as self-employed, be that as a sole trader or as a member of a partnership, you’re probably unsure where to turn when it comes to arranging a mortgage.
Unfortunately, the rather draconian model of one size fits all isn’t always helpful to the self-employed. But, that is not to say it’s tricky getting a mortgage if you are indeed self-employed. At Manchester Money, we’re fully up to speed with specialist lenders who trade in self-employed mortgages, especially since they’ve realised that self-employment in the UK is on the up, they are adjusting their policies to allow for this kind of borrower.
Mortgages for Sole Traders and Partnerships
With a sole trader mortgage, the lender of choice will simply assess the profile of the business’ finances and work out the maximum borrowing permitted by taking the net profit of the business into account. With partnerships, lenders won’t discriminate because you’re in a partnership. What they will do is undertake the application as normal but the amount that can be borrowed will be assessed by the share amount that is allocated to each separate partner.
Back in the day, a self-employed person was able to self-certify, which essentially meant that you could make a declaration of your income without providing any evidence. However, this did mean that applicants were known to stretch the truth about how much they earned in order to be able to borrow more. The downside being that many people obtained a mortgage that they were unable to repay.
This kind of approach disappeared after the financial crash in 2008 and then was banned completely in 2011. This meant that lenders, in accordance with regulations set out by the FCA (Financial Conduct Authority) now had a responsibility to obtain proof of the income of the self-employed worker, rather than essentially take their word for it, which is what happened previously.
As you’ll no doubt be aware, a PAYE employee’s process is rather more simple. They provide payslips and a reference from their employer when looking to obtain a mortgage. However, as you are reading this, you will have realised that as a sole trader or a member of a partnership, you do not have that luxury. Instead, you will need to present your business accounts and possibly your SA302 year-end tax calculation which you will have received from HM Revenue and Customs. This is usually accompanied by your tax year overview.
As with all mortgage applications, criteria and requirements vary greatly from lender to lender. Some may ask for one or two years’ worth of accounts or SA302s. Some expect your accounts to be prepared by a chartered accountant. All this is to work out the affordability of the mortgage you’re looking to achieve.
To reiterate, as a sole trader your borrowings will be based on your net profit. As a partnership, it will be down to the share of net profit you receive. The total amount you can borrow varies from 3.5 times income up to 5 times income in some cases.
Manchester Money can help you through this process, it doesn’t need to be an additional stress point for you or your business.
What is an SA302 and how do I get one?
The best advice we can give here is to talk to your accountant. Or, if you complete your own tax return via self-assessment online, you can sign into your account and print off your SA302.
Do I need to have been trading for a certain length of time before I can get a mortgage?
Generally speaking, lenders will expect you to have at least 12 months of trading under your belt before they will accept an application for a mortgage. That said, some will request proof of more than this. If you’ve been trading for under a year as a contractor, some lenders may take into account your current daily contract rate, which helps them work out an annual income equating to the maximum figure you can borrow.
What other things do I need to consider when applying for a mortgage?
As has been said many times, lending criteria differs a lot from lender to lender. But, despite these differences, the criteria used to decipher whether or not you should be given a mortgage are essentially the same. The obvious one is the proof of income, but in addition, you may also be asked for:
- Bank statements for the last 3 months
- Proof of identity, e.g. driving licence, passport
- Proof of your current address by way of utility bill
The lender will also undertake a credit scoring system internally – age, employment, etc. and also an external credit checks – such as Experian, Equifax and the like. As you will no doubt have seen, you can register with the external bodies yourself and undertake your own external credit check, giving yourself the ‘heads up’
Would it help if I put down a larger deposit?
In a word no. But obviously the larger the deposit, the lesser the repayments. If your income figure is verified and you meet the lender’s criteria, then you will qualify for the same mortgage products and the same loan to value (LTV) ratio. However, if your application falls outside the remit of the standard assessment criteria, then the mortgage lender may well ask for a larger deposit to be put down thus reducing the risk to the lender of the borrower missing payments.
Sole Trader and Partnership Mortgage advice
You might start out on your mortgage journey thinking you can obtain a mortgage yourself. After all, you are self-employed. However, there are many benefits to using Manchester Money. We have many years’ experience in arranging challenging mortgages, we know the lenders inside out and who is more likely to accept your application. We know the pitfalls, the benefits and best of all, we can undertake all the leg work for you, handling the whole process, from top to toe, which includes all the liaison that comes with it! Leaving you free to get on with what you do best – running your own business.
What rate of interest would I pay as a sole trader?
The rates for a sole trader are exactly the same as for those taking out a standard mortgage who is employed. Lenders don’t discriminate against your employment status. Their view is that you receive a mortgage which is in tandem with your eligibility and it is an affordable one.
What would be the best mortgage lender for a sole trader?
You can safely assume that if a mortgage lender is offering mortgages, then there will be an option available for a sole trader. We work with many lenders including the standard high street ones, along with the more niche product specialist ones. This would be a process undertaken by Manchester Money to ascertain the best product for you and your circumstances.
What would be the best mortgage lender for a partnership?
Exactly as above for sole traders. We would assess your current situation and present to you the best mortgage products available on the market.
Would a history of bad credit affect my sole trader mortgage?
Potentially. But as with all lending, it is possible to source mortgage products which are tailored to your financial history. We would search the market, combine our knowledge with your circumstances and present your case to a mortgage lender who specialises in bad credit.