With around 4.5 million self-employed people in the UK, applying for a mortgage as a sole trader, business partner, or self-employed professional is far from uncommon – but it can be trickier than for somebody in full-time employment.
However, there are plenty of excellent mortgage products available, and lenders that will consider sole trader applicants.
The key is understanding why a variable income structure is perceived as higher risk and compiling your application with all the supporting information necessary for your lender to approve.
In this guide, Think Plutus explains how mortgage lenders evaluate sole trading income, the documentation you need for an affordability assessment, and what to expect from the application process.
Types of Sole Trader Mortgage
When we refer to ‘sole trader mortgages’, we are not discussing a specific product designed exclusively for self-employed business owners. Instead, we mean a mortgage with sufficient eligibility terms suited to sole trader borrowers.
Some UK lenders specialise in non-standard mortgages and might have a broader product range for certain job types (such as self-employed & locum doctors, accountants or dentists), but the rates and terms vary considerably.
Mainstream banks sometimes accept sole trader applicants but tend to require higher deposits and more years of consecutive trading accounts to meet their accepted risk profile.
Niche, specialist mortgage lenders are normally more flexible and may be more competitive if they are accustomed to sole trader applicants.
Applying for a Mortgage as a New Sole Trader
Regardless of the lender you select, you will need to provide evidence of your income to help a lender calculate an annual average.
They will usually ask for the following:
- Self-assessment income tax returns
- Financial statements and business accounts
- Bank statements
The rule of thumb is that you need three years of trading records to successfully apply for a sole trader mortgage, although some lenders are happy with less.
New sole traders can find the process challenging because most lenders will not consider a sole trader with less than 12 months of trading history – this is because they have no way of checking what you are likely to earn and whether you can afford the repayments.
There are exceptions. Some lenders will accept CIS contractors in the construction sector with only six months of accounts, and others will approve sole trader mortgages for newly self-employed professionals with evidence of suitable qualifications.
You can also secure a sole trader mortgage if you have years of experience within your sector and have transitioned from an employed to a self-employed role using the same skills and expertise.
Documentation Required to Apply for a Sole Trader Mortgage
The core reason mortgages for sole traders can be fiddly is that your income will change from year to year. Unlike an employed person, who can provide payslips and an employment contract, you cannot clearly state what you will earn in the next 12 months.
Therefore, lenders prefer to have as much information as possible to calculate an average yearly income and decide what they can offer to lend.
You will usually need:
- Proof of ID: passport or driving licence
- Proof of address: council tax or utility bills
- Tax returns: SA302s or tax calculation forms
ID documents are a standard requirement for any mortgage, but a lender might also request access to several months of bank statements.
They use those to verify whether your projected income looks accurate or determine whether your current earnings are similar to previous periods.
Affordability assessments will also include an examination of other debts, regular outgoings and other income streams.
Eligibility Criteria for a Sole Trader Mortgage
Every lender determines its own eligibility policies and rules. The general criteria below apply to most sole trader mortgages, although there are usually alternative options if you fall outside of these requirements.
Sole traders who have been in business for several years are considered a safer bet because there is less likelihood that their business will fail.
Lenders prefer applicants with several years of experience, steady earnings, and an established client base because it indicates a better prospect of continuing income sufficient to keep pace with the repayments.
Any responsible lender needs to verify that you can afford the mortgage payments before they make a formal offer.
If your mortgage application is for a residential home, lenders also need to abide by regulatory rules around lending, so they cannot offer a mortgage to a sole trader without any basis to calculate that the loan is manageable.
Although many people perceive that this involves assessing your income, lenders must also look at your outgoings and other debts.
Most lenders will approach a sole trader application by reviewing the last two or three years of tax returns and arriving at an average annual income.
They will also look at your debts, and review whether they believe you can afford a mortgage repayment alongside your existing obligations using a calculation called the debt-to-income ratio.
It works like this:
- An income of £4,000 per month with £1,800 of outgoings means a debt-to-income ratio of 45%.
- The calculation is £1,800 outgoings, divided by £4,000 income, multiplied by 100 to arrive at a percentage.
- A debt-to-income score of under 35% is considered good. Most lenders will accept up to 49%, although your options might be limited if you have debts comprising over 50% of your monthly earnings.
The Loan to Value or LTV shows how much of the property value you wish to borrow. The balance is normally the deposit or the equity in the home if you are remortgaging.
Higher deposits are always advantageous and normally mean a lower interest rate because the loan constitutes a lower risk to the lender.
For example, if you bought a property worth £500,000 and had a 90% LTV, you would put down a £50,000 deposit and borrow £450,000 from the lender.
If you could not make the repayments, and the lender needed to sell the property, they would struggle to make back the full value of the debt since homes sold under repossession normally achieve lower than market value.
That same mortgage at a 70% LTV with a £150,000 deposit is a less high-risk prospect.
Sole traders usually need a minimum deposit of at least 10% to 15%. Lenders may ask for a higher down payment, particularly if there are other circumstances such as a short trading history, or a less-than-ideal credit score.
Any property considered non-standard is harder to mortgage because lenders may find them more difficult to sell in a repossession scenario or because the upkeep costs are uncertain.
Non-standard examples include thatched cottages, timber-framed houses and contemporary constructions built from materials other than bricks and mortar.
Securing a mortgage against a non-standard property as a sole trader may take more work. Still, an independent mortgage broker can advise which lenders are most likely to approve the application.
Another criterion that is not specific to sole traders is age. Most lenders have an upper age limit, which could be:
- Up to 55 or 60 as a new mortgage applicant.
- Up to between 70 and 85 at the end of the mortgage term.
There are specialist lenders without any age cap. Still, you will almost certainly need advice from a whole-of-market broker if you are a sole trader and likely to be beyond retirement age when you finish repaying the mortgage.
Borrowing Limits on Sole Trader Mortgages
The usual method of calculating a maximum mortgage is to multiply your annual income by between 3.5 and 4.5. For example, if you earn £200,000 a year, you should be able to get a mortgage of between £700,000 and £900,000.
Lenders have a fixed proportion of mortgages they can approve at higher multiples but may, in some cases, approve a loan of five or even six times your income.
However, for most sole traders, a 3.5 times income basis is a safer bet – we can recommend lenders familiar with sole trader mortgages who may be willing to offer a higher upper limit.
You can reverse the calculation to see whether you would be likely to qualify for your preferred mortgage amount.
If you need £500,000 to buy a home, based on 3.5 times income calculations, you need an annual income of £142,857 – between all applicants if it is a joint mortgage.
Applying for a Sole Trader Mortgage with Bad Credit
Sole traders with an adverse credit score will undoubtedly have fewer lenders to choose between, but there are few scenarios where you cannot secure a mortgage at all.
Specialist bad credit mortgage lenders provide various products to help applicants build better credit scores.
They will lend in most circumstances with a few caveats about how long ago your credit issues occurred, and whether you still have debts outstanding.
Bad credit varies substantially from a low credit score due to a lack of credit borrowing to serious credit problems such as bankruptcy. It is always advisable to speak with Think Plutus if you find yourself in this position and want to identify the best way forward.
Professional Sole Trader Mortgage Advice
As we have seen, applying for a mortgage as a sole trader is slightly more complex but by no means unachievable or difficult if you have professional advice and recommendations to rely on.
Think Plutus is a whole-of-market private mortgage broker, supporting a diverse client base in securing competitive mortgage products in various circumstances.
We work with an established network of lenders, from self-employed mortgage experts to mainstream banks and lenders that do not offer products directly to the public.
For more information about securing a sole trader mortgage, finding the right lender, or proving your income, please get in touch at your convenience to schedule a good time to talk.
Sole Trader Mortgage FAQs
In the below section, you will find answers to all the commonly asked questions about sole trader mortgages, eligibility and lenders.
Is a Sole Trader Mortgage Designed for a Residential Property Purchase?
Yes, even though the nature of your income is relevant to a mortgage application, you are borrowing as an individual, not as a sole trader business.
Commercial mortgages work somewhat differently from residential lending, and the product features and terms would significantly differ for a business applicant.
Buying a property to trade from as a sole trader would require a commercial mortgage.
What Happens if I Declare a Lower Income on my Tax Returns and Want a Sole Trader Mortgage?
Self-employed taxpayers can claim a broad range of allowances and tax-deductible expenses, so there is a possibility that the income declared on your tax return does not accurately reflect your real income.
This situation could be tricky if your declared earnings are greatly lower than your profit, and do not represent your ability to repay.
Some lenders will agree to calculate your affordability rating based on your gross or total income, disregarding the expenses deducted from your tax return to arrive at a profit figure.
Can Sole Traders Apply for Self-Certification Mortgages?
No, self-cert mortgages were scrapped in 2014. They used to be a way for sole traders to declare their income without providing any supporting evidence.
The prevalence of inaccurate income declarations and false mortgage applications caused the regulator to prohibit self-certification mortgages going forward.
Are Mortgage Interest Rates Higher for Sole Traders?
High street banks will offer a mortgage to a sole trader, and interest rates from specialist lenders also vary.
The best option is to work with an experienced broker who can recommend lenders or negotiate interest rates before you proceed with the mortgage offer.
However, if you have a good credit record, a suitable deposit and can prove affordability, there is no reason you cannot find a sole trader mortgage with competitive interest rates.