This week I have had a lot of phone calls from sole traders who have an income of £12k per year asking me for mortgages of £300,000+.
Now although they feel this is affordable, we live in a mortgage world that means income must always be proven with formal documents.
If you a sole trader then lenders will consider net profit. This is not your total income i.e. what goes into your bank. You need to deduct your expenses.
You need to have been trading for 12 months from April to April. So for example if you started in September 2016, the first time you could apply for a mortgage as a sole trader would be April 2018.
In April the HMRC provide an SA302 (tax calculation) and a tax year overview this is what we need to apply for your mortgage, especially if you don’t have an accountant.
It could be possible to get a mortgage with 1 years accounts, there are a much smaller number of lenders and some experience in the trade previously could help.
Also a consideration with 1 years accounts is if you have a partner who is employed, it could help your mortgage application because that is a guaranteed income towards the mortgage i.e. reducing the lender risk of non payment.
Broken down when a lender is considering your application, yes they are assessing is it affordable for you now and in the future, but they are also weighing up the chances of you defaulting i.e. missing a payment in the future and what is the likelihood of having to repossess.. seems harsh? They are loaning you hundreds of thousands so they have to consider the worst case scenario.
Anyway I digress, If you have been a sole trader for more than 1 year and have 2+ years trading then most high street lenders will want to average your income over 2 years. Massively unfair in my opinion if you are a growing business with a good track record. Employed people don’t have their last 2 years income averaged, but then on the other side of the coin if they have commission, overtime or bonus some lenders will only use a percentage of this, in most cases that’s 50%.
Sorry went off track again… nearly into a rant..
So one solution we have is a few lenders who can consider your latest year solely, we have a high success rate of getting the latest year accepted because we put together what I like to call “a business case” to give the mortgage underwriter a bit of history and potential future projections about your business.
So back to the original title of the post how much can you borrow take your net profit and multiple it by 5.
I.e. Net profit £30,000 x 5 = £150,000 potentially as a mortgage.
Personally I like to see my clients getting the mortgage amount they want with a 4.5x income multiple as it means we are not completely maxing out affordability.
£30,000 x 4.5 = £135,000 for example.
Now you need to have saved some money for a deposit and the costs of buying the property. It is possible to get a mortgage with a 5% deposit, personally I prefer 10% because more lenders become available to you. You also do need to have extra savings/money to cover the cost of buying a property, but let’s save that for another post.
The consider in the above is if you have any loans, credit cards, car payments, maintenance payment, child care costs, pension contributions.
All these expenses could reduce the amount you can borrow, so the above income multiples is purely a guide because if you earn £12,000 net profit on your SA302 and want to get a mortgage of £300,000 start being realistic, we cannot help you in that circumstance.