A Sole Trader’s guide to getting a mortgage

Sole trader mortgages can prove tricky to get. They shouldn’t. But, two ambiguities mean sole traders never get the same response from one lender to the next:

• Every lender develops its own attitude to risk, which becomes more evident when appraising self-employed mortgage applications
• There is no set definition of self-employment, exemplified by the multiple ways in which sole traders work.

It’s our job to eliminate these ambiguities from the application process. It’s second nature to us because we talk to underwriters at self-employed-friendly lenders every day. Plus, our experience enables us to define what those underwriters look for in self-employed applicants.

In that vein, we’re dedicating this page to the ad hoc gig workers and independent business owners.

If you’re a fixed-term, day rate contractor, go to our Contractor mortgage page.

If you work in the Construction Industry Scheme, visit our Mortgages for CIS workers page.

Are you a company director? If so, we’ve got a dedicated page for you, too: Company director mortgages.

Why choosing the right lender (and broker) is key

It’s no secret that certain lenders specialise in mortgage niches. By way of example, we have strong connections at over thirty lenders who specialise in contractor mortgages. Many of these contractor-friendly lenders also go the extra mile for sole traders.

You might say, ‘All lenders do self-employed mortgages, so what’s the big deal?’

Since we began offering mortgages for the flexible workforce in 2004, we’ve developed our own network of lenders. We know that they treat sole traders with at least the same respect that they show PAYE employees.

We know this because, despite working differently to employees, they offer sole traders the same great rates. In addition, they offer similar income multipliers.

So, providing all other aspects of your borrower profile are sound, you will get a mortgage offer 5 x your net income. In some instances, our lenders may even offer you more. But it’s imperative you go through a broker who knows you and your industry to make this happen.

Getting an experienced mortgage broker on your side

When you get in touch with us, we’ll assign you an experienced case manager. They will be an experienced broker who’ll be with you for the entire journey. Moreover, they’ll know exactly what to look for to get a successful sole trader mortgage over the line. That includes knowing instinctively which lender is best for your situation.

Supported by an experienced admin, that broker will get to know you. Yes, getting you a mortgage now is the main priority. But that’s only really a stepping stone.

To truly help, we’ll go the extra mile. What are your career and homeownership dreams? What are your plans when your new mortgage introductory term comes to an end? How can we make buying your home/remortgaging today an integral part of that journey?

We can even help if you’ve got bad credit working against you. Here’s everything else you need to know about sole trader and partnership mortgages.

Let’s talk about your work history

Many lenders’ default prerequisite for sole traders’ work history is two to three years. That’s okay if you’re an established business owner/freelancer. But what if you’re only just starting out? Or if your business has suddenly taken off over the last twelve months?

That’s where we come in. As they’ve proved to us time and again, our lenders only need 12 months’ work history for self-employed applicants. That includes sole traders and freelancers!

What sole traders need to prove their income

To evidence your last twelve months’ income, we will need:

• Three- to twelve months’ bank statements (how many fluctuate, depending on the lender)
• Your most recent SA302, plus a Tax Year Overview and/or signed-off accounts from a registered, qualified accountant

This means that we can only use the income you’ve declared to HMRC. From that, a lender will use your net profit to work out mortgage affordability.

We understand that some sole traders only record a certain amount in their books for tax planning purposes. But that tactic won’t help you when it comes to borrowing for your mortgage.

Why don’t I just remortgage with my existing lender? It’s easier.

Many sole traders, once they’ve landed a mortgage, don’t want to rock the boat. When it’s time to remortgage, they limit their options to those that their current lender offers.

We get it. These days, remortgaging with your existing lender is far easier than switching to a new lender. But that’s where lenders have got you!

You are essentially relying on your lender to offer the best rates available in the market. With so many lenders offering competitive rates to sole traders, what are the chances your lender has the very best rates?

It all comes down to what you value most: your time or your disposable income.

If you’re budget-conscious, it’s worth stepping back and reviewing the entire market – not just the offer your current lender presents to you.

Our mortgage brokers will give your remortgage the same care and attention as your original mortgage. They’ll compare the latest deals from your existing lender (i.e., a product transfer) against others across the market. This ensures we weigh up every option.

And if it turns out that staying with your current lender really is the best move? We’ll manage the product transfer for you without charging a broker fee.

Further documentation and credit history

Beyond proving your income, lenders typically require only a couple of additional documents. You’ll need to provide proof of your address. You can do this using utility or council tax bills.

You’ll also need some form of photo ID. Your passport or driver’s license will tick that box.

Your credit history

Lenders will also check your credit file. This will show details of your credit cards, overdrafts and loans.

If you don’t know what’s on your credit report, we strongly advise you get a hold of it. So many mortgage applicants don’t, often to their detriment.

Today, there are many companies that maintain credit files (the biggest being Experian, Equifax, and TransUnion). Some banks even offer credit scores through their online banking app.

Alternatively, you can use CheckMyFile. We do. They combine all three of the big CRAs’ data into one report. This is a supreme advantage. Lenders use one or two CRAs to check credit histories. But we have no way of knowing which. With CheckMy File, you cover all the bases.

When you sign up, you can self-generate a report that shows you what’s on file against you.

There may be something there that you’ve settled, but the company in question hasn’t updated the register. No end of times, a credit issue has thrown up a red flag, causing a lender to reject an application. This includes issues that an applicant has long since resolved, but the company has not updated the credit file.

If you don’t know about an issue, how can you resolve it? For the sake of one month’s subscription (or even getting a free credit report), applicants have fallen at the last hurdle. Don’t let that be you!

Individual lending criteria for sole traders, broken down

In addition to your trading history, lenders’ affordability calculations also consider various other factors. The better your borrower profile addresses these criteria, the more likely you are to be successful

Mortgage affordability

The underpinning value of any lender’s assessment is: can you afford to repay what you want to borrow?

Your income and outstanding debts go a long way to help them answer this question. But it’s more than that. That’s why lenders request bank statements alongside your accounts and tax declaration.

Disposable income also plays a part. If you know you’re on the cusp of what you can afford, here are a couple of tips.

Two tips to free up disposable income/credit score

The first tip is fairly obvious, but it may require a sacrifice (or two) from you. You have to prove that you’re serious to a lender. As such, you must demonstrate intent.

If your extracurricular activities consume a fair percentage of your disposable income, rein them in. These could include hobbies (record collecting, Formula One, daytrips and excursions, sporting events, etc.). Or they could be lifestyle choices (going to the pub/club, high-end fashion, beauty regimes, the gym, etc.).

We’re not saying ‘stop being healthy’, or become a monk/nun. But are there ways you can curb your spending, put a hold on superfluous purchases? Doing so may even change your attitude, moving forward.

The second is not so obvious. But it’s this: don’t splurge on a considered purchase until after your mortgage has completed.

Back in the day, a considered purchase meant buying a car, upgrading a kitchen/bathroom or buying new appliances. In today’s culture, a considered purchase can be an everyday item you take for granted.

Ask yourself: do you really need the latest iPhone/Android device right now? Are you sure you can’t wait a few more months to upgrade from a 49″ TV to a 65″ model?

We tend to pay these purchases off monthly. On their own, they hardly seem significant. But they are credit agreements. That means the full amount you owe can appear on your credit statement. And the less significant debt you have, the better.

The advantages of saving a bigger deposit

There’s this persistent myth that self-employed people need bigger mortgage deposits. It’s a hangover from the days of (the now defunct) self-cert mortgages. And, strictly speaking, it’s not true.

But that’s not to say you shouldn’t save as much of a deposit as possible. That’s because a bigger deposit does have advantages. Again, it comes back to ‘risk’.

Avoiding negative equity

The bigger the deposit you have, the lower the LTV ratio on what you borrow. This is important. The lower the Loan-to-Value, the more equity you have in your home.

Equity can act like a buffer, should anything happen to your ability to repay your mortgage. It can also help stave of negative equity if house prices were to fall.

If you can’t pay your mortgage (and you don’t sell your home), your lender will look to repossess your property. If you’ve only put down a small deposit (say, 5% [95% LTV]) the lender will be lucky to get their money back. But if you’ve put down 15% [85% LTV], the risk of negative equity is minimal.

This is why lenders offer more competitive rates if you put down a bigger deposit. It has absolutely nothing to do with the way you work!

Trading history

We’ve already touched on how long lenders typically require you to have worked. With our lenders, sole traders can get a mortgage with just 12 months’ trading history. But there’s another side to this coin.

When appraising your application, a lender will also look at the industry in which you work. They do this to ascertain if your industry/income is sustainable.

With tech changing so many markets so swiftly, it’s easy to understand why they do this. This is an extreme example, but what if you were a repairer of analogue TV aerials? That used to be a thing. But today, with the switch to digital, there’s no such thing as analogue TV.

As a sole trader, you have more capacity than many to be adaptable. An underwriter will want to know about that flexibility, especially if you work in a dying industry.

Will I pay more for my mortgage?

With our network of lenders, you’ll get at least as competitive a mortgage interest rate as PAYE employees. Thanks to their strict underwriting process, once you’ve proved you’re good for a mortgage, you’re on a level playing field.

The only times you might be penalised are if:

• you have a smaller deposit
• you have bad credit

We’ve covered the advantages of having a bigger deposit earlier in this guide. However, let’s clarify what we mean by getting a mortgage with bad credit.

Mortgages for sole traders with bad credit

Bad credit doesn’t have to mean bad options – especially if you’re self-employed.

A growing number of specialist lenders now focus on adverse credit, and that’s no accident. Since the pandemic and the cost-of-living crisis, more people have faced financial difficulties; lenders have had to adapt.

The good news is, the more lenders who specialise in bad credit, the more competitive each must become.

A very few lenders are now even considering applicants who’ve previously had missed mortgage payments. That never used to happen! It just goes to show how flexible bad credit mortgage providers have become.

However, if you have bumps on your credit file, it’s essential to show a lender that you’re taking action to address them. That’s why we urge everyone to get a copy of their credit report and address their regular outgoings.

You’ll find lenders much more amenable if you’re making reparations to issues on your credit file.

So, yes: you might have to work harder to prove your income and its sustainability as a sole trader. But hopefully, this guide has outlined the barriers and what you need to do to overcome them.

If you have any questions about getting a mortgage as a sole trader, get in touch with one of our experienced brokers today.