Many of my clients are around six months away from receiving their annual bonus which in most cases can make up a significant percentage of their income.
Bonus month is a busy time for me and I’m never sure what each client meeting will hold – some
people are happy with what they have been awarded and some are set to self-combust with anger.
Whatever the outcome, bonus payments can play a big factor in whether a client can borrow the amount they need for that new dream home or not. Here are a few reminders on all things bonus and mortgage related.
Number of years bonus required
Many of the biggest lenders want a history of two years of annual bonus at the same firm before they will consider lending against this income. However, more and more lenders are taking one year’s bonus into account.
Percentage of bonus lenders accept
The annual bonus is not usually guaranteed, so most lenders won’t take all of it into account when working out how much they will lend. The few lenders that do, tend to apply lower income multipliers. Most lenders take 50% of the bonus amount and some look at the latest year, others take the two-year average. Some will go as high as 60% or 70%.
I know several lenders whose rates are really competitive, who only want one year’s bonus and will lend against 60% of bonus.
Bonus paid in anything other than cash
It is quite common in the City to get a percentage of your bonus held back and paid in shares which vest over time. The high street lenders do not take vesting shares into account as they don’t understand the terms and conditions or if the bonus will be paid if a client leaves their job before the shares vest. Any calculations are based upon the paid cash element, not the total bonus statement. The private banks will consider lending against share allocation but the fees for these banks and the rates available make them much less attractive options.
Bonus paid in anything other than sterling
A broker’s nightmare. Having clients employed by global investment firms, I often see base salary in GBP but the bonus in dollars (or other currencies).
A lot of high street banks do not lend on any bonus that is not in GBP. I know of just two good lenders who will consider it. Typically, lenders convert to sterling at the exchange rate at the time of application.
They then ‘haircut’ the bonus by 25% to account for current interest rate fluctuation. The resulting figure is the base amount of which 50-60% is then used in their calculations.
So non-GBP bonus is not a deal breaker, but the actual amount a lender will take into account is minimal.
Bonus in previous job
Most lenders will only lend against bonus with a current employer. If you have recently moved job, almost all lenders will ignore previous bonus regardless of your track record. I have had a few successful cases recently where the new employers HR department have confirmed that a bonus for the new employee is likely in the first year, but this is an exception rather than a rule.
A very rare thing in the City but occasionally investment professionals will get a guaranteed bonus in a new role to replace lost bonus if for example they’ve been head hunted. A lot of lenders are actually OK with bonus that is guaranteed in a new job and I even know a lender with good rates that takes 100% of a guaranteed bonus into account.
Salary sacrifice into pension
From a financial advice point of view, I think this is a great bit of long term planning for most clients. However as most High Street lenders assess applications using a computer, rather than a human underwriter, it’s very much a case of using whatever amount appears on your payslip. The lender does not care about your reasons for wanting to reduce the cash paid element of the bonus.
Thankfully there are a couple of lenders that will factor the amount back into a client’s income calculation if you can provide proof of the bonus sacrifice.
If bonus is less than the previous year we need to understand why. If for example base salary has increased, this is probably fine. If you’re porting a mortgage and the lender needs figures from the past two years, you may have to explain why and reassure the lender that a pattern isn’t emerging.
Future or predicted bonus
This has no value to a lender as it has not happened yet. I don’t know a lender that will work off anything other than what you can prove.
This all shows that you need to know the detailed criteria of each lender if you want to secure the maximum mortgage using bonus. Luckily, day to day we deal with all the above bonus related issues and more, so if you receive some of your remuneration in anything other than basic salary, get in touch – I’d be happy to advise on your situation.