Mortgages for Sole Traders and Partnerships
Recently, it seems as if there has been a boom in people choosing to be their own boss. Indeed, although the past couple of years in which the pandemic casted a shadow over a great majority of businesses, the temporary setbacks signalled possibility for some. Namely, the very real possibility of carrying out work on more flexible terms, on their own terms. The direct consequence was a spurring on for a lot of people to think about going independent, whether this meant creating a startup business, venturing into contract work, or undertaking the freelance dynamic.
However, in the excitement of adopting new prospects such as these, it’s understandable that the effect on one’s chances of getting a mortgage may not have been fully accounted for. Especially today, owing to the present volatility within the housing market, the mortgage market is singularly competitive, even proving quite inaccessible for many. This state includes those who receive their income from a standardised salary, and so is only further amplified with regards to those whose income is trickier to define, such as partners and sole traders. Reason being, primarily, that mortgage providers must be wholly convinced that your income is stable and secure.
Satisfying this requirement is easy enough to do if your employment entitles you to a regular wage, but the topic is complicated if you’re a sole trader or operate within a partnership. Categorically, this doesn’t go to say your mortgage opportunities are nil, there are certainly mortgages for sole traders and partnerships out there. The crux is that you’ll likely need access to specialist advice, given that these are categorised as specialist mortgage types. Even though it demands more effort, relatively speaking, you shouldn’t feel disheartened when trying to get a spot on the property ladder if you’re a sole trader or partnership. After all, the mortgage market caters for a vast variety of personal situations and financial circumstances. Albeit, if you’re a sole trader or partnership looking to get a mortgage, we highly suggest that you hire the services of an expert mortgage broker to help thoroughly assess the options available to you. We at The Mortgage Genie have assisted plenty of our UK clients by landing them a mortgage for sole traders and partnerships, notwithstanding the common barriers. If you’re interested in joining those among our success stories, then be sure to contact us at 01915809890 today.
Yet, despite what we can do for you, it remains recommended that you familiarise yourself with all the salient details regarding mortgages for sole traders and partnerships. So that you can come to terms with the important specifics, we’ve put together this piece which goes over the information you should know on the subject. We’ll cover:
How long do you have to be a sole trader before getting a mortgage?
How do you prove your income for a sole trader or partnership mortgage?
The difference between sole trader mortgages and limited company mortgages
How long do you have to be a sole trader before getting a mortgage?
The length of time you’ve been trading for serves as an initial indication of your suitability to apply for a mortgage. This is because it’s vital that you possess an established financial history, something which can only be developed over time. Again, lenders need evidence that your position as a sole trader or partnership is firm, i.e., that your ability to afford a mortgage is not precarious.
The necessity of comprehensively fulfilling a lender’s affordability check is fairly evident. That is, it would be detrimental for both parties if you were allowed a loan for which you could not comfortably make the typical monthly repayments. As such, self-employed individuals often need to have a record which denotes at least 2 years’ worth of business before submitting a mortgage application. Having said this, it is entirely feasible to get a mortgage with one years’ worth of accounts or even no accounts, although traders in these preliminary stages will unequivocally require the assistance of a broker.
How do you prove your income for a sole trader or partnership mortgage?
As mentioned, lenders want to get a strong idea of your annual income before they consider offering you a mortgage loan. Regardless of one’s employment circumstances, this always means providing adequate proof of income.
In particular cases of sole traders and partnerships, income can be proved by presenting a SA302 income report. This document is sent by HMRC after you’ve submitted your Self Assessment tax return and serves to outline your earnings. It’s also advised to support this documentation with a tax year overview from HMRC. Likewise, if you have a qualified accountant, then lenders are willing to accept a tax calculation from them as well. Additionally, mortgage providers will usually ask to see proof of address, photo ID, and bank statements from you.
On the back of having an accountant, it’s significant that their role can involve legally minimising your tax liability legally in order to reduce your taxable income. In spite of this appearing good for your finances, it can have a negative influence when you come to apply for a mortgage. Namely, because it will make your income seem lower than it actually is, causing the lender to question your affordability.
Can I get a mortgage as a sole trader or partner?
Whether or not you can get a mortgage as a sole trader or partner is determined by more than just your affordability, you’ll also have to meet other facets of a lender’s criteria if you’re to be deemed as eligible. This matter factors in the property itself that you’re after, specifically, the loan size you’re asking for.
As a general rule, the bigger the mortgage loan you want, the harder it will be to secure it. In practice, if you want a mortgage with a high loan-to-value (LTV) ratio, then there will be less mortgage providers who are willing to offer you a loan. This is due to the fact that a higher LTV ratio indicates a larger expense on the lender’s part. Followingly, 90% LTV mortgages and 95% LTV mortgages may be out of reach if you’re a sole trader or partnership. Whereas, 85% LTV mortgages, 75% LTV mortgages, and 80% LTV mortgages are more of a reasonable ask. The maximum amount a lender is willing to offer equates to between 4-5x the total income you receive, depending on the lender.
Inherently, the LTV ratio that’s open to you will figure in the size of the mortgage deposit you have access to. Consequently, the more sizable the mortgage deposit you put forward, the easier it will be to secure a loan. Moreover, mortgage deposits are integral because they also signify your money-handling capabilities, an attribute which is of high value in potential borrowers, in the eyes of lenders. Not to mention, it’s in your best interest to accrue a decent deposit sum because this will further entitle you to better interest rates, i.e., lower monthly mortgage repayments.
Are sole trader mortgages commercial mortgages?
Mortgages for sole traders and partnerships utilise a commercial income, and this is often cause for some confusion. Despite these particular mortgages being based upon a commercial income, they are still classed as being residential mortgages.
The distinction lies in commercial mortgages being used solely in order to purchase commercial properties, those which are a part of a business venture’s functions. On the other hand, a residential mortgage, as per the name, is for a property which will be used as housing, regardless of the form of income which funded its purchase.
The difference between sole trader mortgages and limited company mortgages
In a similar vein to the previous point, there are central distinctions which should be understood before you apply for a mortgage. Such distinctions are important because the way in which you approach a mortgage application varies depending on the type of mortgage.
For instance, if you are a sole trader or are in a partnership then you cannot obtain a limited company mortgage. However, if you’re a company director, then you are able to apply for a mortgage specifically designed for company directors. The core difference is that the affordability of each is calculated using variable documentation. That is, company directors often pay themselves a base salary which is accompanied by dividends, something that sole traders and partnerships cannot draw on. Naturally, this changes how lenders view a candidate, so it’s a notable feature to recognise. To find out the most suitable mortgage solution for your personal position, it’s relevant to reiterate here that a mortgage broker can make the necessary evaluations for you.
Bad credit mortgages for sole traders and partnerships
As we’ve made clear, mortgages for sole traders and those within partnerships are harder to get a hold of. Chiefly, because only selected specialist lenders who have experience with understanding incomes arising from such circumstances are able to provide corresponding deals. Relative to high street lenders, there’s a limited availability of these specialist lenders, and this is a point of frustration for many self-employed people. When bad credit is added to this already complex situation, it’s easy to get disheartened concerning a mortgage.
Admittedly, alongside your income and the size of your mortgage deposit, a credit check is another crucial part of your eligibility assessment. Credit checks reveal your credit score to lenders, as well as if you’ve had related financial issues such as failures to meet payday loans, court county judgements (CCJs), IVAs, or have ever filed for bankruptcy. Evidently, the presence of any of these on your personal profile will work to negatively impact your chances of being approved for a mortgage, and might directly result in lenders rejecting you. Yet, the severity of such instances is reduced if they occurred over six years ago, and they do not go so far as to rule out your eligibility altogether. In essence, you can absolutely get a mortgage for sole traders and partnerships with bad credit, provided you get the correct advice from a specialist mortgage broker. A mortgage broker such as ourselves is equipped with the expertise to match you with a lender who is accustomed to handling applications that are marked by distinct individual financial circumstances. What’s more, we’ll strive to get you the most competitive deals on the market, something to consider when accounting for the extra fees and charges that come with every mortgage package.
It’s noteworthy that hard credit checks leave a mark on your report. And so, if you want to get an idea of your current financial suitability before you apply for a mortgage, you can use our free credit check tool (£14.99 per month after the free 30-day trial). Using it will help you to discern any possible mistakes or fraudulent activity on your profile, so that you can deal with such problems as soon as possible. The trial and subscription can be cancelled at any time.
We at The Mortgage Genie have comprehensive knowledge on how to get a mortgage, and are committed to helping people secure loans of all types. We hope that this article has answered any burning questions you may have had surrounding mortgages for sole traders and partnerships, all while clearing up the glaring ambiguities.
Each day we help a growing number of people to achieve housing happiness by finding the mortgage product that’s right for them, one which is tailored to their personal situation and financial circumstances, as well as by guiding them through every step of the complicated process. If you require a team of expert mortgage brokers, then be sure to get in touch with us at 01915809890 and we’ll get started on securing that dream house for you. And why not see how much you could borrow up to today by using our mortgage calculator?