Mortgage as a Sole Trader

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

Yes. A sole trader is no different to an employed person, or a limited company or an LLP – you’re still earning money. All we need to do is prove how much you’re earning. So whether you’re a sole trader, partnership or limited company, yes, you can still apply for a mortgage.

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

The majority of high street lenders would say two years. However, some lenders will look at one year. They are a little more limited, but this year I’ve worked with one sole trader with only a year’s records. It went through with no problems – even though the client had been told by other banks and building societies that he needed an extra year’s accounts.

He didn’t want to wait for a second year as he’d only just completed his first 12 months, but it had been a very good year. We based it on that and it flew through. So, one year is possible, but the majority of lenders would tell you two years, based on their criteria.

What documents do I need to prove my income?

Each lender has slightly different criteria around proving income. Some require an accountant’s certificate, confirming the net profit, turnover and how long you’ve been a sole trader. Others require the last two years’ accounts to look at the net profit.

Other lenders make it an awful lot easier, just requiring two years’ tax year overviews and tax calculations – and in some cases just one year. That’s the most common way of proving income.

The tax year overview and tax calculation produced by HMRC or your accountant will confirm your earnings and what you’ve paid tax on within that tax year.

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

If, for argument’s sake, you’re using the tax calculation and tax overviews to prove your income, it’s actually identical to the process of an employed person. For a limited company director, lenders do ordinarily want the tax overview and tax calculations. And that’s exactly the same for a sole trader.

If the lender wants an accountant’s certificate instead, it’s marginally different. Whether you’re a sole trader, company director or LLP, it’s just a case of proving the income. Normally, with two years’ tax overviews and tax calculations, a lender would take an average of those two years.

Perhaps you earned £30,000 last year and £50,000 this year – the majority of lenders wouldn’t use the £50,000. They would take an average and use £40,000 as your income.

If your accounts have gone down in the most current year, they would use the lower figure. So if I reverse the previous example and you had £50,000 last year and £30,000 this year, they would use the lower figure of £30,000.

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

The deposit is exactly the same. You don’t have to put a bigger deposit down because you’re a sole trader. It’s exactly the same as for a limited company, or an employed person.

There is a slight difference in borrowing, which is where some sole traders get confused. Here’s an example. Imagine two people doing the same job – one is a self-employed sole trader and one is employed. They both earn £40,000 a year gross. With the employed person, we would use their gross income, multiply that up and that’s how much they could borrow.

With the sole trader, we actually use their net profit rather than their gross figure. They may write certain costs off against the gross, and if they end up with a £30,000 net profit, we use that £30,000 rather than the £40,000.

So in some cases, a sole trader can’t borrow quite as much as an employed person earning the same gross salary.

A lot of our sole trader clients are tradesmen – plumbers, joiners, brickies – and they say they’re earning £50,000 or £60,000 a year. But that’s the gross figure rather than the net figure. With a sole trader, we always use the net profit.

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

I’m not really an expert in bad credit. The majority of mortgages I arrange tend not to have credit challenges. But there are lenders that would look at sole traders with bad credit, just as they would look at employed people with bad credit. So being a sole trader doesn’t mean your application would be assessed any differently to that of an employed person with bad credit.

There are still lenders that would look at bad credit, whether you’re a sole trader, limited company director or employed.