Self Employed Mortgages and the Sole-Trader
The Mortgage Applicant who is a Sole Trader will be generating turnover in the business. From that turnover, they will deduct business costs leaving profit on which income tax is paid through a self- assessment tax return.
Lender’s key concern is that level of profit before income tax. They are not interested in turnover.
Proving your income
Some Sole Traders engage an Accountant who produces accounts annually, but many submit their own self-assessment tax returns. Mortgage Lenders are generally happy with either approach, provided that profit is provable.
Of course, the Sole Trader will want to claim as much as possible against their business expenses to reduce their income tax bill. This lowers the calculated profit and therefore can impact on maximum mortgage lending.
What to watch out for
You will be asked for proof of income over three years in the form of accounts or Self-Assessment returns.
Your profit (taxable income before personal allowances) will be the figure on which the Mortgage Lender assesses your affordability. Lenders will tend to average out the profit over three years to arrive at a single figure on which to base their calculations. If they see a trend of dropping profits, the alarm bells will ring and it could affect your ability to raise a mortgage.
If you do not submit tax returns, HMRC will want to speak to you, but Mortgage Lenders will not.
If much of your business is ‘cash’, the legality of that is questionable and certainly cannot be considered for a mortgage.
If you do not have three years trading record, most Mortgage Lenders will not consider you.
If you are not prompt in putting your accounts together or submitting your tax returns, this can cause an issue. Mortgage Lenders need the most recent provable period of trading profit to have ended within the past 18 months.
It is extremely unlikely that a Sole Trader will be in a position to be considered by all Mortgage Lenders as a suitable risk – therefore we recommend you do not approach Lenders direct.
If you approach the wrong Mortgage Lender you could waste time, money, and put credit searches on your record unnecessarily.
For this reason, you should ask an Independent Mortgage Broker to help you arrange your mortgage.
If you are asked for your income by your Mortgage Broker, quote your profit after business expenses, but before tax. If this profit shows much variation over the last three trading years, quote the average (total and divide the result by three). If your profit has dropped by more than one tenth in the most recent trading year, make your Broker aware of this.
Be prepared to provide accounts prepared by your Accountant, or SA302’s to cover the last three trading years.