Most children wait excitedly for Christmas, holidays or their birthday.
As a child, I was more excited about the football fixtures being released in June. Weeks of anticipation, pestering my Dad daily to check Teletext, then only to find out the mighty Southend United started with a trip to Carlisle or somewhere equally far away.
As an adult the opening day fixtures are not quite as exciting for me, but I get the same rush of anticipation around bonus time in the City. It really is an exciting time for me - not because I’m on the receiving end, but for the opportunities it creates for clients. I always enjoy existing client reviews or new client meetings and talking to people about their future plans, and at bonus payment time the phone always starts ringing. This year I have been inundated with meetings and to make it more exciting, a few lenders have made some major policy changes which will benefit many of my City based clients. The main changes I am talking to clients about are:
The amount of bonus lenders take into account when working out an income multiple.
After the financial crash, many lenders stopped taking bonus into account in their income calculations. Those that did include it typically only used 50% of the bonus amount and often capped the bonus payment to the same level as basic salary.
A recent trend is of more lenders including bonus payments. One high street lender recently announced it would take 65% of bonus into account. The official policy from that lender is they take the average of the last two years bonus payments. However, in the last three cases we have placed with them, they have agreed to take the most recent years’ bonus figures rather than an average so our clients could borrow the amount they wanted. To be fair to the underwriters, all three clients had really strong cases and for me this is what underwriting is about.
Another good lender we know takes 70% of the last two years bonus as long as the client earns over £80k a year. There is even a lender that takes 100% of the last two years average bonus into account now, although I find the income multipliers with that lender are not overly generous. These changes really make a difference to people who receive large bonus and for years have struggled to borrow the amount they needed. Fewer lenders now limit the bonus to the same level as the basic salary.
Joint applicants but sole name on the deeds.
This is a relatively new concept that one or two smaller lenders started a few years ago and has since been taken over by one of the UK’s biggest lenders. The concept is you can have two people named on the application form, meaning the lender will assess against two incomes, yet the deeds can go in one person’s name only. This can be for residential or buy to let mortgages. I have seen this work really well for clients where one is a non or lower earner who has a buy to let and cannot move elsewhere due to not meeting income criteria or for clients where one person does not want to be a legal owner of a property for tax reasons. Legal and often tax advice should be sought before taking out this type of transaction.
The lender in question has some of the best rates in the market but the application process has been poor so far. I am hoping the lender can iron out these teething problems soon as this area has been really popular with clients.
The rise of interest only mortgages.
For the vast majority of people, interest only mortgages are not a good choice. However, for people that earn a large regular bonus, for people with irregular but high incomes or higher earners that need some flexibility in the way they pay back their capital, they can be the right option.
In the past, lenders either simply didn’t offer interest only mortgages or they needed a ’hard’ repayment vehicle which was often unit trusts or investments to the same value on application as the interest only mortgage requested. One business development manager once told me she has never seen a client meet the interest only criteria of a major bank - it was so stringent.
More frequently we are now seeing lenders willing to offer ‘pure’ interest only mortgages where the ’soft’ repayment method on paper is the sale of their main residence and downsizing in the future. These products almost always have a minimum income level which means they are only available to higher and additional rate tax payers. They also require a minimum equity amount on day one - typically £250k to £300k - so the client can actually buy something in the future when they down size, so the loan to value is limited.
An increasing number of lenders are offering ’part and part’ mortgages which I have championed in the City for years for certain types of client. The products combine interest only and repayment methods. These part and part mortgages used to be limited to 75% LTV but we have recently seen a lender offering up to 80% on this method. The interest only element of the part and part is often limited to 50% with repayment making up the other 25% or 30%.
The key message from me is that the market changes almost weekly and it’s so important to get advice from a broker. Your average person on the street may feel all brokers do the same job but the reality is we talk about high value mortgages day to day, we know the products and the lenders that fit our typical client type and we have access to products and lenders that smaller brokers don’t have.
Do get in touch next time you want to talk about your mortgage options.