Mortgages for Small Business Owners: What You Need to Know

Are you a small business owner or self-employed person hoping to get onto the property ladder? Read below for a guide to help you with mortgages for small business owners.

In May, specialist bank OakNorth announced that it will offer mortgages to small business owners and entrepreneurs.

The bank found that 1 in 10 business owners don’t get their mortgage application approved, and as a response, it plans to close £260m worth of mortgages by the end of the year.

That is certainly welcome news for small business owners given how expensive it is to buy a property.

We outlined the importance of finding the perfect kind of mortgage in our ‘How to Buy a House UK First Time’ post.

Buyers are advised to shop around for a mortgage — preferably with the help of a mortgage adviser — at least 6 months before making a purchase.

It’s an important part of the process that shouldn’t be rushed.

As the goal is to find the right mortgage option to suit your individual needs.

This should also be the goal of small business owners.

So with that in mind, here are the things small business owners need to know about getting a mortgage:

1) Proof of your income is the key

What lenders want is proof of income, because it gives you access to the same range of mortgage options available to employees on payroll (PAYE employed).

In particular, lenders like to have a closer look at business owners’ personal tax calculation (SA302), as it shows income after taxes.

If your SA302 can prove a viable cash flow, then your chance of getting approved increases considerably.

2) The older the business, the better the chances of approval

The length of time your business has been operating also matters.

The Guardian notes in ‘Self-Employed? Here’s How to Get a Mortgage’ that, in general, “the longer you’ve been self-employed, the better.”

For example, two years of accounts, opens doors to more lenders; three years and up is infinitely better.

That is because a longer period of time can help lenders paint a clearer picture of your income.

These 2 questions can help you, as identified by Aldermore Bank’s Charles McDowell:

1. How much is this applicant earning?
2. How confident are we they will sustain that level of earnings?

But while underwriters prefer at least three years’ worth of accounts, it is still possible to get approved on one year’s worth of tax returns.

This was previously discussed in our article ‘Can I Get a Mortgage With One Year Tax Return?’.

In a case like that, it is best to seek professional help (see the last section).

3) Monitor the housing market

A robust housing market increases the chances of being approved a mortgage, provided you meet proof of earning requirements.

Therefore, now might be a good time to apply.

Bloomberg reports that mortgage lending in the UK reached a 9-month high in March, with the number of approvals increasing by almost 6% year-on-year.

That jump translated to 39,980 approvals — the highest since June 2018.

This increase is helping to stabilise the UK housing market. FXCM’s Economic Calendar includes details on the annual Mortgage Approvals report released by the Bank of England, which shows that for April the number of mortgages increased yet again.

This translates to a net mortgage lending of £4.3 billion, slightly higher than the £3.8 billion average, six months prior.

This shows that the UK housing market is starting to recover – meaning that it is the perfect time to apply for a mortgage.

4) Get professional advice

In the Money Advice Service beginner’s guide to mortgages, it is recommended that you seek help from either a mortgage broker or independent financial adviser.

These professionals help you assess the available mortgage options and ultimately make the right choice.

Getting professional also safeguards against the pitfalls of execution-only mortgages, where you can get stuck in a mortgage that isn’t suitable for your specific situation.

Ultimately, your approval will hinge on three critical factors:

1. Steady income: You will need to prove a steady source of income.
2. Credit score: You will need to have good financial standing, meaning an excellent credit score. Which you can ensure by paying everything on time, not maxing out your credit cards (if you have one), minimising credit checks and paying everything in full as opposed to making minimum payments.
3. Your documents: And finally, you’ll need to keep your documents — SA320, bank statements, tax overviews from HMRC, IDs, and proof of address.