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Finding Mortgage Lending for Partnerships and Sole Traders

Finding Mortgage Lending for Partnerships and Sole Traders

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Applying for a mortgage when you are self-employed can feel much more difficult than for somebody in PAYE employment, and yet there are multiple lenders out there offering competitive terms.

This applies to all sorts of professionals, such as:

  • Sole traders
  • Partnerships
  • Limited company directors
  • Non-standard company ownerships

Using the right lender is critical, and by working with a specialist broker such as the Revolution Finance team, the process becomes much easier and streamlined.

For more information about self-employed mortgages, or help to negotiate rates as a partner or sole trader, contact Revolution Brokers on 0330 304 3040 or drop us a message to info@revolutionbrokers.co.uk.

How do mortgages work for sole traders?

There isn't a particular mortgage product specifically for sole traders - but this type of lending is a residential mortgage that has been adapted to the unique circumstances of a self-employed applicant.

Specialist lenders understand self-employment income structures, and take a more flexible approach to their lending criteria, with options such as:

  • Basing lending on gross income.
  • Using remittance slips to evidence your earnings.
  • Having a shorter trading history - sometimes as little as six months.

As a sole trader or business partner, it is essential to work with the right lenders who can flex their mortgage terms to fit your requirements.

Do I need a minimum number of years trading to get a sole trader mortgage?

The longer your trading history, the more simple the mortgage application process. This is because lenders need to check your average income, and some have minimum requirements for the length of trading history they need to see.

Before the credit crunch, self-employed applicants could self-cert their income, without needing to prove this. However, this led to borrowers taking out mortgages they could not afford to pay, and in the worst-case scenarios led to properties being repossessed.

Now, lenders must meet responsible lending standards and run through affordability checks before they can make you a mortgage offer.

What are the income requirements for a sole trader mortgage?

The criteria vary between lenders, so the evidence they will need to prove your income can be different.

However, these are industry standard requirements for self-employed professionals:

  • Sole trader: minimum of one year of trading history showing profits made.
  • Partnership: minimum of one year's trading records as above.
  • Contractors: either a year's worth of accounts, or evidence of your day rate.
  • CIS contractors: remittance slips showing your gross income for six months or more.

What documents do I need to apply for a self-employed mortgage?

As a self-employed professional, every sole trader and partnership owner will file tax returns to the end of the tax year, which runs to 5th April.

Most mortgage lenders will calculate your lending maximum based on your tax returns filed, and may also consider company accounts.

The majority of sole traders and partnerships manage their self-assessment tax returns like this:

  • Maintain your own income and expenditure records, and file a self-assessment tax return with HMRC by 31st January following the end of the tax year, or
  • Use a bookkeeper to verify your calculations, and help with the self-assessment process, or,
  • Have a qualified accountant who manages your bookkeeping and files self-assessment accounts on your behalf.

There is no mandatory requirement to use an accountant, either for tax filing purposes or to take out a mortgage, but many small business owners do. If you have business accounts, you can submit these to a mortgage lender as proof of your earnings, provided they have been filed appropriately and verified by an authorised accountant.

Should you not use an accountant, you will usually be asked to provide:

  • A self-assessment tax year summary or statement.
  • Copies of your SA302 tax returns.

As a sole trader, mortgage lenders will consider the total income received as shown on your SA302. If you demonstrate your income via sole trader business accounts, then the lender will either use the net profit or your drawings, to arrive at their lending calculations.

For partnership mortgages, lenders will consider the same figure on your SA302 forms, or if you submit partnership business accounts to support your mortgage application, then they will look at your proportion of the net business profit, or your drawings from the partnership.

What eligibility criteria are essential in partnership and sole trader mortgages?

As with all mortgages, there are several criteria and factors that a lender will take into consideration:

  • LTV ratio (Loan to Value). Most mortgage lenders will lend up to a maximum percentage of the value of the property in question.
  • Deposit value - deposits for sole traders and partnerships are usually similar as for any employed applicant. However, if your application falls outside of the standard criteria, you might find that your deposit requirement is higher.
  • Affordability - all mortgage lenders have to check whether you can afford your repayments, so this is an integral part of the decision-making process.
  • Trading history - most mainstream lenders prefer sole traders or partnerships to have three years of trading history. However, specialist lenders can accept applications with two years or even one year of trading history.

How do mortgage lenders calculate your income as a sole trader?

Typically, a mortgage lender will average your income over the last two to three years. Others will consider only the previous year of trading, although this is a more niche basis.

The calculation varies between lenders, but most will multiply your income by a fixed value to arrive at the maximum they can offer to lend.

Around 4.5 times, your annual income is standard. You can also find lenders who will offer up to five times, or even six times, your average annual earnings.

If you are looking for a specialist secured loan, or a second charge mortgage, you are likely to be able to borrow a higher multiple of your income, provided you meet the other criteria.

As a rough indication of the typical income calculations:

  • Sole trader mortgages - the maximum mortgage is based on five times your average net profit.
  • Partnership mortgages - the maximum mortgage is based on five times your share of the net profits, or five times your average income received per annum.
  • Limited company directors - the maximum mortgage is based on five times your total salary and dividends, or five times your share of the company's net profits.

Can I get a sole trader mortgage with an adverse credit history?

Applicants with bad credit will usually have fewer lenders to choose between. That said, sole traders and partnership owners can apply for bad credit mortgages just the same as any employed applicant can.

The difference is that if you have a business that has been trading for a year or less, you will find fewer specialist bad credit lenders who can consider your application.

If you have three years of trading history, then you have a wider choice of lenders to choose from and are likely to be able to secure more favourable rates.

Can limited company directors apply for a mortgage?

Yes, you can - there are different criteria and rules around mortgages for limited company directors, so the process is not quite the same as for a sole trader or partnership.

Check out our guides on limited company mortgages for more information.

What are the differences between a sole trader and limited company mortgages?

Your trading status will make a difference when it comes to choosing the right lender, and the mortgage rates you are likely to be offered.

Sole traders are self-employed individuals running their own businesses, and as such cannot apply for a mortgage as a limited company. However, if you are a director of an incorporated business, then you can apply for a mortgage using the same basis for income declarations as a sole trader applicant.

This involved declaring your personal income from your self-assessment tax returns, as filed with HMRC at the end of the tax year

In this scenario, you are using your personal income from self-employment to demonstrate your earnings, rather than relying on company accounts.

As a self-employed person in any kind of trading structure, you will need to file an SA302 self-assessment tax return at the end of the year. If you are a director of a limited company, you will also have annual filed accounts submitted to Companies House, as well as a separate corporation tax return.

Many limited companies trade on a different year from the HMRC tax year, which can make a difference to your mortgage application if you are part way through a trading period.

As an illustration:

You are in May, and run a limited company that has a financial year-end of September. The year has been very profitable thus far, and you'd like to move home and take out a larger mortgage to finance this relocation.

May is after the end of the tax year, which ends in April, but before your company financial year ends, in September.

If you apply to a mortgage lender who will only lend based on your company performance, you can apply now, but bear in mind that your mortgage value might be limited as it will be calculated based on last year's profits, and not consider your trading for the year to date.

Alternatively, you could wait until after September, and for your year-end accounts to be finalised and filed, and then apply for a mortgage based on this year's trading profit.

The other option is to apply for a mortgage with a lender who bases their income calculations on your personal income as declared in your self-assessment tax returns. In this scenario, that means you can apply right away, and given that your income will run up to April and include most of the profits earned from this successful year of trading, might be able to borrow much more.

Can sole traders take out commercial mortgages?

A commercial mortgage differs from a residential loan since it is taken out by the business itself, rather than by an individual applicant.

Limited companies can apply for a commercial mortgage to invest in property, and this may include requirements such as directors guarantees, but is not the same product as a residential mortgage for a company director.

What mortgage rates are available for sole traders?

The interest rates you are offered on a sole trader mortgage will depend on how closely you meet the lending criteria of your chosen mortgage provider.

There isn't a standalone sole trader mortgage product, so it's essential to understand the criteria and ensure you only apply to lenders who can consider your application.

Using a niche lender specialising in non-standard applicants is often the ideal solution, as mainstream lenders might consider self-employed people of a higher risk, and therefore not be as competitive in the rates they offer.

This applies to a range of applicants, including:

  • Sole traders
  • Partnerships
  • Contractors
  • Limited company directors

In all of these scenarios, we recommend working with a broker rather than trying to apply for a mortgage through a mainstream lender who may be unable to lend to self-employed applicants.

Which lenders should I apply to for a sole trader mortgage?

Most of the specialist lenders who offer sole trader mortgages can also accept applications from partnership owners and limited company directors.

The primary difference between these applications is in how your income is calculated.

As an example, Halifax offers a sole trader mortgage, but the criteria are different from mortgages for partnership and limited company owners. This applies to most of the high street banks and mortgage lenders.

To establish the most competitive lender for your circumstances, the best option is to work with a broker who understands the market and can tailor your mortgage application to your requirements.

Professional advice on sole trader and partnership mortgages

Applying for a mortgage as a self-employed business owner is always slightly more complex than for those in employment - and it is essential to work with an expert broker who has access to the whole of the market and so can offer you the very best deals.

Particularly if you have been trading for less than three years, or want to take out a mortgage based on your earnings in the last twelve months, you are almost certain to find a better deal with an experienced broker than is available on the open market.

For more support and advice, contact the Revolution Brokers team on 0330 304 3040 or send us a message to info@revolutionbrokers.co.uk.

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FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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