Getting a Mortgage as a Self Employed Sole Trader

A sole trader is someone who runs their own business as an individual. Unlike a limited company, the business is not a separate legal entity from its owner.

This structure is common among tradespeople, freelancers, consultants and other people who work independently.

If you own a limited company or operate in a partnership, lenders may calculate your income differently. It is therefore important to establish your correct employment status before assessing your mortgage options.

Yes. Sole traders can apply for the same broad range of residential mortgages as employed applicants, subject to meeting the lender’s affordability and eligibility
requirements.

There is no separate “self-employed mortgage”. The main difference is how your income is evidenced and assessed.

An employed applicant might demonstrate their income through payslips, whereas a sole trader will usually provide evidence from their tax returns or finalised accounts.

The lender wants to establish that the business produces a reliable income and appears capable of continuing to do so.

Many mortgage lenders prefer sole traders to have at least two completed years of trading figures. This gives them a track record from which to assess the stability of the business and its income.

However, two years is not an absolute requirement across the whole market. Some lenders may consider an applicant with one completed year, particularly where:

• The first year’s figures are strong
• The applicant has experience in the same industry
• Self-employment is a natural continuation of their previous work
• The business appears sustainable
• The remainder of the application is strong

Options are likely to be more limited if you have not yet completed your first trading year or submitted a tax return. Future projections alone are not normally sufficient for a standard mortgage application.

If you have recently become self-employed, it is worth checking your position rather than automatically assuming you must wait two or three years.

For a sole trader, lenders will normally assess your net profit, rather than your turnover.

Turnover is the total income received by the business before its running costs are deducted. Net profit is what remains after allowable business expenses have been taken into account.

For example, if your annual turnover is £80,000 but you have £30,000 of business expenses, your net profit would be £50,000. It is generally the £50,000 figure—not the £80,000 turnover—that a lender will use when assessing affordability.

This can cause confusion where the amount passing through a business account appears much higher than the income shown on the tax return. From the lender’s perspective, the expenses declared to HMRC are costs incurred in generating the business income and therefore cannot normally be treated as personal earnings as well.

Where two years’ figures are available, lenders commonly use either:

• An average of the two years’ net profit; or
• The latest year’s net profit if it is lower than the average

The precise method depends on the lender.

If your profit has increased, some lenders may still use an average, while others may place more weight on the latest year. They may want to understand what caused a particularly large increase and whether it is likely to continue.

If your profit has fallen, lenders will usually take a more cautious view. They may use the latest, lower figure and ask why the income decreased. A fall does not automatically mean your application will be declined, but the lender may want reassurance that it was temporary rather than part of an ongoing downward trend.

Recent business accounts, current-year performance or an explanation from your accountant may help provide context.

They can.

Legitimate business expenses reduce your taxable net profit. This may reduce your tax bill, but it can also reduce the income a mortgage lender uses in its affordability assessment.

This doesn’t mean you should avoid claiming genuine expenses or make tax decisions solely to improve a future mortgage application. Your tax return must always be complete and accurate. However, it is useful to understand the potential mortgage implications and discuss your plans with both your accountant and
mortgage adviser.

Tax planning and mortgage affordability do not always pull in the same direction, so preparing early can help avoid surprises.

Requirements vary between lenders, but a sole trader may be asked to provide:

• HMRC tax calculations, often referred to as SA302s
• The corresponding tax year overviews
• Finalised business accounts, where available
• Recent personal and business bank statements
• Evidence of your deposit
• Identification and address documents

An HMRC tax calculation shows the income declared and the resulting tax calculation for the year. The tax year overview helps demonstrate the amount of tax due and whether the figures correspond with HMRC’s records.

Some lenders also accept tax computations produced through an accountant’s commercial software, usually alongside the relevant HMRC tax year overview. Others may use an accountant’s certificate.

Downloading the full Self Assessment return may not provide the specific documents the lender requires, so it is important to obtain the correct paperwork before applying.

You do not necessarily need an accountant to obtain a mortgage. If you submit your own returns, the relevant tax documents may be available through your HMRC online account. An accountant can nevertheless be helpful where the business is more complex or the figures have changed significantly.

Lenders usually rely on completed and verifiable figures rather than draft accounts or estimates. If a recently completed trading year is important to your affordability, you may need to finalise and submit the relevant tax return before that income can be considered.

This is particularly important where your profits have increased and the older figures do not support the amount you need to borrow.

Speak to your accountant before rushing a return solely for a mortgage application. The figures must be accurate, and HMRC’s records may take time to update after submission.

Being self-employed does not automatically mean you will pay a higher mortgage rate.

The rate available will depend on the lender and product, the size of your deposit, your credit history, the property and whether you meet the lender’s criteria.

The challenge is often finding a lender whose method of assessing self-employed income suits your circumstances. A lender offering a competitive rate is of little use if its income calculation does not support the mortgage you require.

A little preparation can make the process much smoother:

1. Keep your tax returns and business records up to date.
2. Obtain the correct tax calculations and tax year overviews.
3. Keep personal and business finances clearly organised.
4. Be prepared to explain significant changes in profit.
5. Check how much you may be able to borrow before committing to a property.
6. Speak to your accountant and mortgage adviser early if your income or business structure may change.

Getting a mortgage as a sole trader is often more straightforward than people expect. The important part is presenting your income correctly and approaching a lender whose criteria suit your trading history and financial circumstances.

At Crescent Mortgages, we can assess your sole-trader income, explain which documents are likely to be required and identify suitable mortgage options. We do not charge a fee for mortgage advice.

Your home may be repossessed if you do not keep up repayments on your mortgage.