Mortgages for sole traders

Why working with the right lender - and broker - matters

Not all lenders are the same. Some are far more experienced and willing to work with self-employed applicants than others. Since our inception in 2004, we’ve built a strong network of lenders who genuinely understand how sole traders work.

These lenders don’t penalise you for being self-employed. They offer sole traders the same interest rates and similar income multipliers as employed (PAYE) applicants. In most cases, you can borrow up to five times your net income. In some situations, if your stars align, our lenders may offer an even higher multiplier. That means you can potentially borrow more than you could with a traditional high street lender direct.

However, achieving this outcome isn’t straightforward. It’s essential that you work with a specialist broker who:

• Understands your situation, both business and personal
• Is willing to go into bat for you
• Knows which lender is right for you, given the big picture

What to expect when you work with our specialist brokers

When you reach out to us, we’ll assign you a dedicated case manager from the outset. Your manager will be an experienced mortgage broker; along with their dedicated admin team, they’ll guide you through every step of the application process.

They’ll take the time to fully understand your situation. That doesn’t just mean your current mortgage needs; they’ll also consider your longer-term goals. For example:

• What are your plans for your home and career over the next few years?
• What will happen at the end of your initial mortgage term? Do you plan to remortgage, move, or upsize/downsize?
• Are there any financial challenges, such as recent fluctuations between payment structures or a history of poor credit, that you need to address?

We believe this is a really important part of our service that you’ll struggle to find elsewhere. A mortgage is a stepping stone to a better life, not a simple unemotional transaction. Our aim is to help you make the right decision today, with your future in mind.

Your work history: what matters to lenders

Many lenders require sole traders to have been self-employed for two to three years before they even consider a mortgage application. This can be a barrier if:

• You’re newer to self-employment,
• Your business has grown quickly in the past year, or
• You’ve chopped and changed payment structures over the last few years (lenders will want to know why!).

The lenders we work with are different. In most cases, they only require 12 months’ trading history, provided there’s a history of working on the same trade. This applies to sole traders and freelancers alike.

In general, even if you’ve only been working for yourself for one year, our lenders can still offer you a competitive, relevant mortgage.

The documents you’ll need to support mortgage affordability

Lenders want to know you’re serious about the mortgage application. It’s important that you get everything together before approaching them.

To confirm your income over the past twelve months, lenders will typically ask for the following:

• Three to twelve months of bank statements, business and personal (the exact number will depend on the lender’s specific lending criteria/attitude to risk)
• Your most recent SA302 form (your tax calculation from HMRC)
• A Tax Year Overview from HMRC and/or
• Signed accounts from a qualified, registered accountant

It’s important to understand that lenders will only consider income that you have declared to HMRC. Your net profit — the amount left over after costs and expenses have been deducted from your turnover is what they use to calculate how much you can borrow.

Some sole traders choose to record lower profits in their accounts for tax purposes. This is a perfectly legal strategy, but it may reduce the amount you’re able to borrow. If you’re planning to apply for a mortgage, it’s worth discussing your tax strategy with your accountant well in advance.

Why a remortgage with your existing lender limits your options

When it’s time to remortgage, many sole traders simply stay with their current lender. It’s less hassle, there are fewer forms to complete, and there’s a perceived ‘loyalty’ there. They also offer you your next deal well in advance of the remortgage deadline to save you from falling onto their Standard Variable Rate. We understand the appeal.

However, by doing this, you’ll be missing out on potentially better rates available elsewhere. Your existing lender has no obligation to offer you the most competitive deal on the market, even if you’ve banked with them for years. And, during the waiting period that they’ve tied you in to your remortgage, who’s to say that they won’t have better rates themselves?

But you should also recognise this: you may be a lower risk to another lender if you’ve kept up your repayments and managed your personal finances responsibly. You may even have enough equity in your home to take you into the next LTV band. Your existing lender may overlook these critical factors that could help you secure more competitive rates!

Using our Rate Monitoring Service, our brokers will compare your current lender’s offer (if you’ve approached them) against deals from across the wider market. But here’s the thing. If a lower rate becomes available before your remortgage starts, we’ll automatically move you onto that rate! And, if rates go up, no bother. You’ve locked in the rate appropriate when you started using the service. It really is win-win!

Our targeted approach ensures you make an informed decision, not simply a convenient one. And even if your existing lender does turn out to offer the best rate, we can manage the ‘product transfer’ for you, at no additional broker fee.

Your credit history

In addition to your income documents, you’ll also need:

• Proof of address (e.g. a utility bill or council tax bill)
• Photo identification (a passport or driving licence),

You should also be aware that lenders will review your credit file.

Your credit file contains a record of your credit cards, loans, pay-later services, overdrafts, and any missed or late payments. Many applicants are totally unaware of exactly what credit reference agencies hold in their files. This can cause problems later in the application process.

We strongly recommend obtaining a copy of your credit report before you apply for a mortgage. You can check your report through Experian, Equifax, or TransUnion. Some banks also provide credit scores through their online banking app.

Freelancer Financials uses a service called CheckMyFile, which combines data from all three major credit reference agencies into a single report. This is particularly useful because different lenders use different agencies. The service is free for seven days, then £14.99/month thereafter.

With CheckMyFile, you can see everything in one place. If there are any errors or unresolved issues in your file, you must address these before you apply.

You may have a debt you’ve paid that the creditor hasn’t updated on your file. Or you may have debts that people living at a previous address of yours have incurred. Any unresolved issue, no matter how small, can cause a lender to decline your application.

Improving your mortgage affordability (in the eyes of lenders)

Lenders assess mortgage affordability by examining your income, existing debts, and your day-to-day spending. Underwriters review bank statements methodically, so it’s worth being mindful of your outgoings in the months before you apply.

Two practical steps can make a meaningful difference:

1. Reduce unnecessary spending

Before applying, try to limit non-essential expenditure, including your day-to-day expenditure. Underwriters need to see that you’re financially responsible. This doesn’t mean you should change your lifestyle entirely. But if there are areas where you can temporarily reduce spending, it may strengthen your application.

2. Avoid new credit agreements before completion

A new mobile phone contract, an appliance taken out on finance, or a buy-now-pay-later purchase may each seem insignificant on its own. But, each one will generate a credit agreement, the full outstanding balance of which will appear on your credit file. Unless they’re absolutely necessary, it’s better to wait until after your mortgage has completed before taking on any other new financial commitments.

Your deposit (why bigger is better)

There’s a common misconception that self-employed people need to save a larger deposit than employed applicants. This isn’t strictly true, but I know how the myth originated (a story for another day!). That said, saving a larger deposit does offer real advantages.

The key concept here is Loan-to-Value (LTV). LTV is the ratio between what you borrow and the value of the property. The more you put down as a deposit, the lower your LTV. Crucially, that means the lower the lender’s risk when approving your mortgage loan.

A lower LTV typically means:

• More competitive interest rates
• A greater buffer against falling house prices (reducing the risk of negative equity)
• A stronger overall application

For example, a 15% deposit gives you 85% LTV, which is considerably safer for both you and the lender than a 5% deposit at 95% LTV. This has nothing to do with being self-employed; it applies universally to all borrowers equally.

Mortgages for sole traders with bad credit

Impaired credit won’t automatically disqualify you from getting a mortgage, as it may have before. In recent years, more specialist lenders have begun to focus on lending criteria for applicants with adverse credit. This type of mortgage has become particularly prevalent since the pandemic and the cost-of-living difficulties that followed.

Greater competition amongst poor-credit lenders is definitely a positive development. The more lenders that operate in this space, the more competitive their interest rates need to be. This increases the routes to homeownership for borrowers who’ve experienced credit issues.

Some specialist lenders will now even consider applicants who have previously missed mortgage payments. Up until very recently, a missed mortgage payment was an automatic rejection. So, you can see the lengths to which lenders are going to accommodate borrowers with impaired credit.

The most important thing you can do if you have a poor credit history is to demonstrate that you’re actively addressing the issues. Make sure that:

• Your credit report is up to date,
• You’re meeting your current financial obligations
• You can clearly explain any past difficulties

Lenders respond well to applicants who are both transparent and are taking positive steps forward. Anything you can do to make them view your situation more positively is a win for you!

Summary: your next steps

We won’t wrap it up in cotton wool. As a sole trader, you may face additional scrutiny during the mortgage process. However, with the right broker and the right lender, there’s no reason you should fare any worse than an employed applicant.

The key steps to give yourself the best chance of success are:

• Ensure you have at least twelve months’ trading history
• Keep your HMRC tax records accurate and up to date (especially in light of the new Making Tax Digital rules for sole traders)
• Get a copy of your credit report well in advance to resolve any outstanding issues
• Reduce unnecessary spending and avoid new credit commitments before applying
• Save as large a deposit as you reasonably can

If you have any questions about applying for a mortgage as a sole trader, I’d encourage you to have a chat with one of our experienced brokers.

We’re here to help with not only your next step on the property ladder, but also align your lifestyle choices with home ownership. That’s the real power behind partnering with Freelancer Financials. Get started today!