How Just Mortgage Brokers Can Help You
For many people who are registered self-employed – either as a sole trader or as a member of a partnership – it can be difficult to know where to turn when it comes to getting a mortgage. The inflexible, one-size-fits-all lending criteria adopted by many mainstream lenders sometimes is not easily compatible with the nature of sole trader or partnership finances.
This is certainly not to say that it is impossible to get a mortgage if you are self-employed. A number of niche lenders specialise in self-employed mortgages, while some high-street lenders are recognising that, as the number of self-employed people in the UK rises, they need to adjust their lending policies to better accommodate this type of borrower.
How long do I need to have been trading for before getting a mortgage?
As a rule of thumb, lenders will expect you to have been trading as a sole trader or partnership for at least 12 months before you apply for a mortgage – although many lenders will prefer to see more than a single year’s worth of accounts for the purposes of income verification (see below).
If you have been trading for less than a year but are a contractor, some lenders may be prepared to make a lending decision based on your current contract, using the day rate to work out an annual income figure for the purposes of making a lending affordability decision, and calculating the maximum amount you can borrow.
How do I prove my income as a sole trader or partnership?
For years, self-employed mortgage applicants were able to make a declaration of their income without the need to provide any documentary evidence. These were known as “self-certification” mortgages and, while in many ways they were convenient for both the lender and the applicant, they allowed applicants to stretch the truth about their income and, in some cases, obtain a mortgage that was beyond their ability to repay.
Self-certification mortgages essentially disappeared following the 2008 financial crisis, and were banned outright in 2011. Current mortgage regulations set down by the Financial Conduct Authority (FCA) mean that lenders now have a responsibility to obtain proof of the income of self-employed mortgage applicants, the same as they would for someone in salaried employment.
Whereas a PAYE employee can easily provide payslips and an employer’s reference when applying for a mortgage, sole traders and those in a partnership unfortunately do not have that luxury. Instead, lenders will typically ask to see your business accounts, and/or your SA302 year-end tax calculation from HM Revenue & Customs (usually accompanied by the corresponding tax year overview). You can find more information about the SA302 and how to get it below.
As mentioned above, the exact requirements will vary from one lender to the next, but a lender might ask for either one, two or three years’ worth of accounts or SA302s (usually no more than this). Lenders often expect accounts to be either prepared by or certified by a chartered accountant. If a lender asks for multiple years’ accounts, they might either use the most recent year’s income, the lowest year’s income or (more commonly) an average to work out your verified income figure.
Affordability calculations and the total amount you can borrow will be based on:
- Sole Trader – Net Profit
- Partnership – Share of Net Profit
The total amount you can borrow will, again, vary from lender to lender. It is usually based on a multiple of your total income, and can typically be in the range from 3.5 times income to 5 times income. The lender will apply their own individual affordability assessment to your verified income figure, to give the maximum total amount they will be willing to lend you.
What is an SA302 and how do I get it?
If you are a sole trader or partnership and submit an annual Self Assessment tax return to HMRC (either yourself or via an accountant) then they will produce an SA302 year-end tax calculation. This shows your total declared income from all sources, and your income tax and National Insurance contributions due for that tax year. Up to four years’ SA302 can be obtained from HMRC.
- If you complete your tax return yourself via the Self Assessment online portal, you can sign into your account and print off the SA302 directly.
- If you or your accountant completes your tax return using commercial accounting software, it can be printed off using the software.
- If you submit your tax return by post, you need to contact HMRC to request your SA302.
If you submit a postal tax return, do not have a printer, or if the lender only accepts original SA302s (as opposed to home-printed copies) then you can either call the HMRC Self Assessment helpline on 0300 200 3310, or write to Self Assessment, HM Revenue and Customs, BX9 1AS. When contacting HMRC you should quote your National Insurance number and Unique Taxpayer Reference (UTR). Note that HMRC can take up to two weeks to send out SA302s.
What other factors will the lender take into account?
Despite the differences in income verification methods between a standard mortgage application and one being made by a self-employed person, the other criteria used to assess whether or not to give you a mortgage will be essentially the same. Aside from proof of income, the lender may also ask for:
- Bank statements – usually for the past three months
- Proof of identity for each person applying – for example a passport or driving licence
- Proof of your current address – such as a utility bill or council tax statement
The lender’s decision is usually based on both an internal “credit scoring” system – which takes account of all the information you have provided in your application, such as your age, employment history, any existing financial relationship with the lender, and so on – and an external check of your credit history. Credit checks are made with at least one of the three UK credit reference agencies: Equifax, Experian and Callcredit (which offers credit report services as Noddle).
You can check your credit history and obtain copies of your credit records directly from each of the three reference agencies:
Past credit problems may limit your mortgage options, but by no means necessarily disqualify you from getting a mortgage. At Just Mortgage Brokers we specialise in helping people with bad credit records obtain mortgage lending. Call us on 0800 114 3753 to discuss how we can help.
Do I need to put down a bigger deposit if I am self-employed?
The short answer is no, but there are some exceptions. If your verified income figure meets the same affordability criteria as any other employed applicant, then you should qualify for the same mortgage products, and the same maximum loan-to-value (LTV) ratio for the mortgage. Typically, lenders’ maximum overall LTV is 95% (therefore requiring a 5% deposit); however, certain mortgage products require a bigger deposit to qualify for the deal.
If your mortgage application falls outside the lender’s standard assessment criteria, in some cases the lender might be prepared to offer the mortgage on the condition that a larger deposit is put down; this reduces the LTV ratio and therefore lessens the lender’s exposure to risk in the event of the borrower defaulting on payments.
What if I trade as a limited company?
If you run your self-employed business as a limited company director, rather than a sole trader or partnership, things can be a little more complicated. This is because lenders can vary quite significantly in how they work out your total income for the purposes of affordability calculation and working out how much you can borrow. While all lenders will consider salary drawn from the company as a base income figure, some vary on whether and how they take into account dividend payments and profits retained within the company structure.
A number of lenders offer mortgage products specifically designed for limited company directors, and these can take the form of either personal mortgages (as would be granted to a sole trader or partner) or commercial mortgages where the lending is made to the limited company rather than the director; for example, some buy-to-let landlords purchase property via commercial, limited company mortgages.
Be aware that fees and interest rates on commercial mortgages are normally higher than for an equivalent personal mortgage. There may be other caveats too; for example, lenders may ask a limited company director to sign a personal guarantee, making them personally responsible for the mortgage debt to a degree beyond that which would normally apply to a limited liability company.
We cover mortgages for company directors in more depth here.
How do I choose the best mortgage?
As we have discussed above, different lenders can take very different approaches to how they assess mortgage applications from people who are sole traders or in a partnership. This means that one of the major factors in choosing a mortgage is finding the lender that is best suited to your unique circumstances in terms of how long you have been trading, how many years’ accounts (or SA302s) they ask for, how they calculate affordability and maximum lending limit in relation to your income, and so on.
It is important to remember that there are many mortgage options out there beyond the big high-street banks and building societies. While some mainstream lenders have become more flexible in terms of lending to the self-employed in recent years, there are also a number of smaller, more niche lenders around who specialise in lending to sole traders, partners and limited company directors.
When looking at and comparing mortgage deals, it is vital to think beyond just the initial headline interest rate. Consider other factors such as:
- Does the mortgage have an arrangement fee, and how does this compare with other mortgage products with the same or other lenders?
- What type of mortgage product do you want: do you want the security of a fixed interest rate, or are you willing to accept the risk of rate increases with a variable tracker or capped product?
- How long does the deal last, and are there any early repayment charges if you decide to move your mortgage to another lender either within the agreed product term, or after?
How we can help
There can be advantages in using a mortgage broker to find and arrange a mortgage, beyond just the convenience of having someone else do all the legwork. At Just Mortgage Brokers we have years of experience in arranging mortgages for sole traders and partnerships; that means we know the market, we know how different lenders operate, and we can help you to find not just the mortgage deal that is right for you, but the lender that is the best fit to your needs.
Once we have found the right mortgage for you, we will handle your mortgage application from beginning to end, liaising on your behalf with the lender, your conveyancing solicitor and any other parties. Letting us take care of the ins and outs of your mortgage application means less hassle for you. Call us today on 0800 114 3753, or use our online contact form, to discuss your mortgage needs and how we can help.