Our Guide to Sole Trader Recently Gone Limited Mortgages
There are a number of advantages to such an arrangement, but one of the drawbacks is the possible difficulty in then securing a mortgage with your change of trading style.
Our guide to sole trader recently gone limited mortgages may help you overcome those difficulties and secure an advance that lets you own your own home.
Why incorporate your sole trader business?
The following are some of the advantages in turning your business as a sole trader into a limited liability company:
- a limited company is an entirely separate legal identity – accountants Danbro explain that there must be at least one company director, but that the company is owned by its shareholders (although you may still be the sole shareholder and director of the company yourself);
- as a sole trader, you alone are responsible for the fortunes of the business and may be sued personally for the debts and other liabilities of the business – you bear unlimited liability;
- just as the name suggests, however, a limited liability company is liable only up to the limits of the company’s assets – your personal assets and credit rating is safely separate and protected;
- a limited company pays Corporation Tax on the profits earned by the business in that year and the rate of tax is lower than the income tax you otherwise pay as a sole trader;
- you decide if and when to withdraw money from your company by paying yourself as a director (although you must then pay income tax and national insurance when you are paid);
- as Company Registrations points out, the UK is probably the easiest and cheapest place in the world in which to set up a company – and you only need a minimum of £1 capital requirement.
Why may it be difficult for new limited company directors to get a mortgage?
With all of these financial advantages in having turned your successful business as a sole trader into a limited company, why might it be difficult to get a mortgage as the director of your newly-formed company?
As a company director, you are effectively self-employed. And as many other self-employed individuals, you are likely to struggle to secure a mortgage – and many other types of credit.
The reason lies in any mortgage lender’s need for reassurance that you have sufficient income now and long into the future in order to make the mortgage repayments – the affordability of your mortgage is critical and, as pointed out by the Council of Mortgage Lenders (CML), lenders are bound by the rules of the Financial Conduct Authority (FCA) in this respect.
Although policies vary from one lender to another, many have particular difficulty in establishing the actual, regular income of the director of a new limited company –company director mortgages are typically more difficult to obtain.
As a director, for instance, you might have decided to withdraw a salary that kept you below the threshold on which you need to pay income tax and leave the remainder of what you are due as retained profits for the benefit and growth of the company.
But many mortgage lenders consider only the salary you have withdrawn as your income and disregard your retained profits in the company.
Even if you have a long history as a successful sole trader, therefore, it may be difficult to convince a mortgage lender of your income if you become the director of a newly incorporated limited company – and the lender may insist on a further two or three years of audited accounts.
The good news, however, is that some mortgage lenders have no such requirement – and mortgage specialists such as us here at Needing Advice may help you to find just those lenders.
What proof of income will be required?
The upshot in many cases is that if you have recently changed trading styles (and formed a limited liability company once you have started earning larger sums as a sole trader), finding a mortgage with that change of trading style might seem impossible – especially if you don’t yet have a full year’s trading as a limited company.
Most lenders will regard your new company as a fresh business and, as such, require the standard one to three years’-worth of trading accounts from the new business to establish your income and affordability. And that’s even if you had been running the exact same business for 10 years under the previous trading style (as a sole trader)!
Thankfully not all lenders are the same and there are a select few who consider the previous business as evidence of income even though it will have ceased trading.
What is classed as income?
Mortgage lenders typically adopt policies that allow maximum lending based on a multiple of the applicant’s income. So, if you are in business as a self-employed person, what is likely to be classed as income?
Different lenders have different criteria, but affordability is generally calculated according to the trading style of your business, as follows:
- sole trader – net profit;
- partner – your share of the partnership’s net profit; or
- limited company director – the salary you draw, plus any dividends issued by the company, with some specialist mortgage lenders instead basing their calculation on your share of the net profits of your limited company.
How much deposit will I need?
Limited company directors are usually treated the same as every other borrower when it comes to deposits.
The exception may be those specialist lenders (prepared to consider the whole of your share in the net profits of a company), since they prefer a bigger deposit in order to mitigate the risk.
Next steps – Mortgages with change of trading style
If you are a sole trader recently gone limited mortgages are likely to be more difficult to obtain – for the reasons explained in this guide.
But those difficulties are by no means insurmountable and here at Needing Advice we may help you overcome them.