Sole Traders

Mortgages are available to Sole Traders

A sole trader is a self employed person. You can trade as a sole trader in a wide number of occupations

Sole Traders could be self employed Plumbers or Electricians or Builders or indeed any trade. They could equally be Web Designers, Hairdressers or Taxi Drivers.

It is the simplest tax structure to set up with just one owner

A Sole Trader can employ people.

A Sole Trader is subject to UK income tax and will need to submit a tax return annually.

The tax year runs from 6th April to 5th April the following year.

Your self assessment submission for your business will need to be submitted by 31st January for the previous year ending 5th April.

However, take care....

Most mortgage lenders require that Accounts or Inland Revenue statements of income are NOT over 18 months old

So if your tax year ends in April 2024 (say) you must submit your tax return BEFORE October 2024 otherwise your accounts are at risk of being too old!!

This WILL affect you if you are a sole trader and applying for a mortgage.

Your tax return can be submitted through an Accountant or directly to the Inland Revenue through Self Assessment

Minimum deposit for a sole trader

The minimum deposit for a sole trader is NO deposit!!

However, with NO deposit the deals on offer are limited to 5 year fixed rates

Furthermore you will need at least 2 full years accounts or 2 years Inland Revenue statements of income (SA302) 

A wider range of deals is available if you can raise a 5 or 10% deposit

What is the deposit for a sole trader with just one years accounts or SA302?

The minimum deposit with one years accounts or Inland Revenue statement of income is 5%

What deposit should I put down

You should put down as large a deposit that you can afford, bearing in mind the following.

You should reduce or clear any credit card debt

Credit card debt that is not cleared on a monthly basis is often charged at very high interest rates. You should aim to clear this at the earliest opportunity

Credit card and loan debt will reduce the amount you are able to borrow

Lenders interest rates are typically linked to deposit bands that increase by a multiple of 5%

For example, you can expect lower mortgage rates if your deposit is 15% than if you had a deposit of 10%

But if your deposit is 7%, you will be offered the same rates as if you had a 5% deposit

Another consideration is if put all of your savings towards a deposit - what would you do if you were to lose your job?

Your savings provide a means of paying your mortgage and bills if there is a problem with your income

How much can be borrowed by a Sole Trader

As a guide, Mortgage lenders may lend up to 4.5x's your net profit figure. For a joint mortgage application it may be up to 4.5 x's the joint income.

In certain limited situations it may be possible to borrow up to 6 x's your income

This is just an indication. Some lenders may lend more in certain circumstances. Some lenders will have a lower limit. Please fill in our Mortgage Enquiry if you are hoping to maximise your borrowing

The maximum mortgage borrowing will be ascertained by assessing your income and outgoings

A number of factors are considered...

Sole Traders Income

Lenders may take the latest pre-tax profits as shown on your latest Inland Revenue statement of Income. The figure may be averaged together with the previous year's profits unless the most recent year is lower than the previous years profits - that is the profits are declining.

If profits are declining it is likely the most recent years profits will be used 

Lenders may be concerned if your business profits are reducing. Is this declining trend likely to continue or is there a unique reason for the down-turn.

For example, Covid19 will have affected many businesses adversely, but it is reasonable to expect that for most businesses, things would improve as the situation returns to normal

Your net profits from self employment will be clearly listed on your Tax statement of Income

There may be other items of income that may also be acceptable income

For example you may have a second income.

You may have income from land and property (buy to let property). This may be acceptable by some lenders

If the mortgage application is in joint names and your partner has an income then this can be added to your income (for the purposes of establishing your borrowing potential).

Benefit income, including child benefit may also be allowable

Next we look at your Outgoings

Personal Outgoings

Personal outgoings are the monthly outgoings that you pay each month. These may include Loan and credit commitments, Food, clothing and household expenditure. Council tax and Utility bills (Gas, Electric, Water and Telephone). Education, Commuting and Car expenses. Insurance and Pension commitments. Other Leisure and Social expense.

Sole Traders Expenses

Your business profits equal your gross income minus your business expenses.

The Business expenses are already factored into your net profits. You should take care not to double count these expenses.

For example, if you use your car in the course of your business you do not need to include 100% of your car outgoings. If the business use is 50% then you only need to declare 50% of your costs as a personal expense

Your New Mortgage Payments

Your new mortgage will have a monthly payment, but Lenders will not use this in their calculation. 

Mortgage lenders have to check that your mortgage is affordable in most situations so they will 'stress test' your mortgage

Typically lenders will apply a notional mortgage interest rate that is higher than the current charge rate. The idea being to check that your mortgage is affordable in most circumstances. For example, the lender may apply a rate equal to the lenders standard variable rate + 2%.

Affordability for a Sole Trader

The affordability check is quite straightforward. Calculate your monthly net income. Sum up your monthly outgoings. Add the new mortgage payments at a suitable stressed rate and there should be a surplus left over.

For a self employed person, your income may be irregular which will complicate this calculation. And it may be sensible to ask yourself what is a reasonable monthly drawing you could safely pay yourself

Maximum borrowing for a Sole Trader

To establish your maximum borrowing potential, you can contact us, by filling in the Mortgage Enquiry form

Important Considerations for Sole Traders when taking out a mortgage

Viability of your business

You are ultimately responsible for maintaining your mortgage. A Mortgage Adviser can advise based upon your previous income but can't be expected to assess the viability or future prospects of your business.

Does most of your income come from one or two sources. What would you do if for some reason these sources dry up.

It is often a good idea NOT to rely on a single source of income, unless you are confident you can replace that income

It is not possible to identify all future threats to your profits but you should consider what you would do in the event of a downturn

Income Tax

Always keep in mind that you MUST keep back money for INCOME TAX. The Inland Revenue are unlikely to be sympathetic if you have spent all the profits!! even if it is on your mortgage.

You are ultimately responsible for keeping up your mortgage payments, so they need to be at a level that is sustainable

Emergency Fund

Although this is the last item it is perhaps the most important

You need to keep back an emergency fund for periods when your income is reduced

It is recommended that you keep back a minimum of 6 months income in an accessible account. This will give you 6 months to make other arrangements.  

The old expression 'make hay when the sun shines' could be interpreted that you should save as much as you can when times are good - you may need those savings in the future