Sole trader electrician Mortgages

Working as a contractor while searching for the right mortgage for you can seem long a long process. But it doesn’t have to be.

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Mortgages for Sole Trader Electricians - what are they?

Mortgages for sole trader electricians are no different to any other type of mortgage, however every lender needs to be confident that you are able to afford the mortgage you are asking to borrow, If you are an electrician then more often than not you will be self employed or subbing on the CIS scheme. It can be a little bit more difficult to prove your income in this scenario but mortgages for self-employed electricians are possible.

If you are a self-employed electrician, then you will likely be one of the following.

How does a lender look at my income when I am a Self Employed Electrician?

This all depends on what your income is and how the lender will look at it, we have access to over 90+ lenders and we are also specialists in mortgages for Self Employed people, We have broken down what a lender might lend to you and how they work out your income based on your self employed structure below – 

Mortgages for Sole Trader Electricians

If you are a sole trader and not on the CIS scheme then lenders will treat you as a self employed. This means that your income that will be used for the assessment of affordability will be based on your self-assessment tax calculations.

The key number is your Net Profit, The picture below shows where this is on your self-assessment tax calculation (also called an SA302)

Sole trader electrician mortgages

This is all of your turnover minus your expenses in the year, if you are a sole trader then your income will show as “self employed income”

Typically a lender will use your latest two years SA302’s and average the profit between the two years. So for example if your net profit for you latest year was £50,000 and your previous year was £40,000 then your average income would be £45,000.

The key number is your Net Profit, The picture below shows where this is on your self-assessment tax calculation (also called an SA302)

However! – If your latest year is LOWER than your previous year then lenders will typically only use the lower income figure. So if your previous year was £50,000 and your latest year was £40,000 net profit then the lender would use the £40,000.

There are some lenders that will use the latest years income without averaging, so taking our previous example above a lender would then use £50,000 instead of £45,000. Some of the high street lenders and building societies that do this will only use the latest year subject to underwriter discretion.

What all lenders are looking for is sustainability of your income, if they are going to use the latest years income and this has increased (especially if by a significant amount), then they will need to be satisfied that income is going to maintain at these levels.

We need to tell the right information to the lender to assure them that income can continue at these levels, we are very used to packaging up and telling a full story to the lender to make them aware of the full context. Certain situations that lenders are generally comfortable with and that we have had success with are;

  • Increased profits through increased turnover (and there is a track record of this)
  • Taking on new contracts
  • The previous year had large capital one off expenses (such as vehicles)
  • The previous year was your first year in business with larger setup costs
  • You have more staff in the latest trading year

 

What can really help a lender use the latest years income, is to also have a projection from the accountants to show the current trading years turnover and expected net profit, if these fall into a similar figure to the latest years net profit even if you are not all the way through your trading year then this can really help a lender to use that larger income.

What can really help a lender use the latest years income, is to also have a projection from the accountants to show the current trading years turnover and expected net profit, if these fall into a similar figure to the latest years net profit even if you are not all the way through your trading year then this can really help a lender to use that larger income.

This is where having a mortgage broker behind your back that specialises in mortgages for self employed electricians (and other self employed trades people too) can really help.

Using our expertise in working out how a lender will assess our income we would then approach the market and research who will lend you the amount you need based on all the lenders different criteria. Different lenders lend different amounts because they have different criteria on their affordability.

There are two principle calculations that lenders are utilising;

Loan to Income Ratio (LTI)

This is the lenders cap on lending, a lender will never breach their loan to income ratios, because they are enforced by the FCA our regulator.

Most lenders have a loan to income ratio of 4.5x of your assessable income, but there are some lenders that if you have a good deposit and good income will go to 5 – 5.5x lending, you will usually need at least £65,000 of assessable income and a 15% deposit minimum to achieve these LTI’s, with the 5.5x multiple usually only being available with joint incomes in excess of £100,000.

Affordability Stress Testing

Every lender will also run an affordability calculation, and each lender assesses this is in a slightly different way, ultimately what the lender is doing is as follows;

  • Your assessable income is broken down into a net monthly income
  • Your disposable income is then calculated by taking off all your commitments and essential expenditure
  • The money left over is your disposable income
  • The mortgage payment is then stressed, usually to 3% above the lenders standard variable rate
  • This stressed mortgage payment needs to be affordable within your disposable income

This is why sometimes while a lender may potentially lend up to 4.5x your income this is not always the case, if there are other factors reducing your disposable income then this can affect the maximum loan which is why its always a good idea to speak to a mortgage broker before you start looking at properties. Elements that can affect your affordability are;

  • The term of the mortgage (longer mortgages mean lower repayments)
  • Personal debts (high debt will reduce your disposable income)
  • Dependents (kids cost money! They are factored into the equation)
  • Other committed expenditure (maintenance, child care payments ect)
  • Pension (high pension contributions can reduce your net income, some lenders factor these in, some don’t as they usually can be stopped)
  • The term of the rate (longer fixed rates mean more security for the lender which usually means lower stress testing requirements!)

Firstly we need to find a lender that will fit your circumstances, this is not always easy to do on your own, independent mortgage brokers like us here at Momentum Mortgages are experts at helping self employed electricians.

We offer a free strategy call to everyone to go through your individual circumstances and see what you can borrow, it can be really helpful to do this as early as you can especially if you are coming near the end of the current tax year.

Once we have worked out what you can borrow then we need to get some documents from you to prove your income, what each bank or lender needs will vary.

Once we have all the documentation our next step would be to get some terms agreed in the form of an agreement in principle, tis is essential if you are buying a property as estate agents will likely want to see this before they take your offer on a property seriously.

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Sole trader electrician mortgages

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