One of the highest compliments I’ve received in my career was from a senior manager at a large private bank.
He described me as ‘the man that investment professionals turn to in the City when they want a mortgage’, and it’s true that the majority of my clients tend to be city-based and working as investment professionals. Whilst the firms they work for are varied, the questions they ask and the barriers they face to get a mortgage are generally very similar. Over the years, having so many of these clients has given me a good insight into how best to help those in similar situations.
Investment professionals tend to be paid a basic salary which is supplemented by a substantial annual bonus based on either individual or team performance. In addition to that they may also receive restrictive stock often in the form of shares in the company or in their fund, which vest over a number of years. The aim of this restricted stock is to encourage them to stay with the employer.
When it comes to mortgage applications, the first issue a client may have is that lenders do not include 100% of annual bonus in their assessments.
Clients often wrongly assume they can borrow against their P60 figure but this is rarely the case as clients have a number of income streams, not all of which the lender will accept. Typically, the high street banks take a two-year average of the annual bonus and only at 50% of money received. If that bonus is less than the previous year, the lender will only count 50% of the most recent year’s bonus rather than an average.
We have recently seen some positive moves from a couple of high street lenders regarding bonus. They are starting to look at the most recent bonus only, which tends to work well for clients and we are aware of lenders that consider taking more than 50% of bonus into account.
Although high street lenders do not tend to lend against restricted stock, it does help a mortgage broker when discussing the case with the lender’s underwriter, particularly in borderline cases. Private banks will consider lending against this form of income but the arrangement fees and rates can be unattractive.
Whilst an investment professional’s basic salary is often high, it is the bonus that can significantly increase their annual income. Many of my City clients like to have an element of interest only lending as part of their mortgage repayment strategy due to the ‘lumpy’ way in which they’re paid.
This helps to reduce the day to day cost of the mortgage and allows the client to pay back a lump sum using annual bonus at the end of each year. This is typically up to 10% of the mortgage balance using the annual allowance permitted by lenders.
As a rule, interest only or part and part methods are only available up to 75% LTV.
There are a couple of lenders that make exceptions to this rule but the criteria around this practice is very stringent. Assuming a £1m purchase price, most high street lenders would expect a 25% deposit. Of the remaining 75% required, 50% of that could be borrowed on pure interest only and the remaining 25% repayment over no more than 25 years. Pure interest only means in theory the future sale of property is often the expected repayment method as opposed to e.g. investment ISA's to the same value of the mortgage required which are less common. The reality for the bulk of my clients is that they clear their mortgage balance via bonus pay down long before the lender will call in the debt.
My clients tend to change roles frequently as is the nature of City jobs, and they are often concerned that this will be an issue in their mortgage application.
The reality is that most high street banks will not lend against bonus from a past employer.
Underwriting is always done on a worst case scenario and the lender would argue there is no guarantee that our client would get a bonus in the new role so they would to lend against basic salary only. This is where our strong relationships with bespoke lending banks comes in. They will consider lending against bonus from previous employers as long as the client has moved to a similar line of work. The rates and fees these banks offer are almost as good as the high street but the underwriting is done using a long lost art called common sense rather than the one size fits all approach of your high street banks. Probation periods do not tend to be a problem with these banks but some of the building societies have issues with lending during the probation period of a new job.
Many investment professionals are buying in highly competitive areas and often competing against other likeminded professionals so it is imperative that when they find the property they want to buy we can move quickly.
Sometimes this may mean that the client does not have time to sell their current home before they secure the new property. Clients tend to stress over this point thinking it will be a major deal for lenders yet in reality it does not need to be. If you planned to let out the property then as long as the rent covers the mortgage at the new lenders stress tested level then most lenders tend to ignore the property in the background when working out what a client can borrow. Where it gets tricky is when clients are ambiguous about their property plans, often because they genuinely have not had chance to fully consider their plan.
Clients who have not been in the UK for three years or who are working here on a Visa do have issues with some lenders. Again, subject to the client profile this can be overcome. Mortgages can be obtained up to 95% for clients here on visas. The key with any lending is always the credit score.
As you can see there are many factors that come into play when applying for mortgage. For an investment professional it makes sense to choose a broker that understands the nuances of how the profession works. LIFT-Mortgages have a City office and we have years of expertise in this field so why not get in contact.