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A sole trader is a self-employed person who runs their own business as an individual. There are over 3.1 million sole traders in the UK, and many of them will need to take out a mortgage at some point.
Getting a mortgage as a sole trader can be more challenging than getting a mortgage as an employee, as lenders will need to see evidence of your income and financial stability. However, it is possible to get a mortgage as a sole trader, and there are a number of things you can do to increase your chances of success.
What lenders look for
When lenders assess a sole trader’s application for a mortgage, they will look at a number of factors, including:
- Your income: Lenders will want to see that you have a stable and reliable income. This will usually mean providing them with your latest tax returns and sole trader accounts.
- Your business: Lenders will also want to understand your business and how it operates. They will want to see that your business is profitable and that you have a good track record of paying your bills on time.
- Your assets: Lenders will also want to see that you have some assets to your name, such as savings or property. This will give them some security in case you are unable to repay your mortgage.
How to improve your chances of getting a mortgage
There are a number of things you can do to improve your chances of getting a mortgage as a sole trader, including:
- Get professional advice: If you are thinking of applying for a mortgage, it is a good idea to get professional advice from a mortgage broker. They will be able to help you understand the different types of mortgages available to sole traders and they will be able to negotiate on your behalf with lenders.
- Build up your savings: If you have some savings, this will give you a good credit history and it will also give lenders some security in case you are unable to repay your mortgage.
- Be prepared to provide evidence of your income: Lenders will need to see evidence of your income, so make sure you have your latest tax returns and sole trader accounts ready to provide.
- Choose the right lender: Not all lenders are willing to lend to sole traders, so it is important to choose a lender that has a good track record of lending to self-employed borrowers.
Getting a mortgage as a sole trader can be challenging, but it is possible. By following these tips, you can increase your chances of success.
Example of how we can help a sole trader
A barrister who had been increasing their income year-on-year approached us to purchase their first residential property. They wanted to purchase a £1.35 million property with a 15% deposit, borrowing £1.147 million. They had additional savings, but these were set aside for future tax payments.
The barrister’s tax returns showed a profit of £200,000 from self-employment. However, their sole trader accounts showed a net profit of £225,000, due to the inclusion of work in progress (WIP). WIP is the amount of work that a barrister has completed but has not yet been invoiced or paid for.
Not all lenders are willing to accept sole trader accounts for affordability, but those that do could potentially lend an additional £137,500 based on the additional WIP income. This can be a significant boost for self-employed borrowers who are looking to purchase a larger property.
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This example shows how WIP can be a valuable asset for self-employed borrowers who are looking to purchase a property. By including WIP in their income, borrowers can potentially qualify for a larger mortgage and move into a property that meets their needs for the foreseeable future.