It’s annual bonus time for many and I’ve been asked by several clients over the past week how lenders will treat that bonus.
The truth is bonus income is viewed in different ways by different lenders. Many of my clients work in the City with the accompanying significant bonus payments. If you’re relying on bonus income in a mortgage application, finding the right lender is key. This is where you need the right broker.
The first thing to note is that most lenders will use the two-year average of bonus payments. They then only count 50 to 60 percent of it due to the potentially inconsistent nature of this form of income.
There are a small number of banks that simply refuse to accept bonus income as a valid form of income to borrow against. Bizarrely these lenders will often lend against monthly bonus but not annual bonus.
Next come lenders that will lend against bonus but only to a ceiling that is the same as the basic salary. For example, if your basic salary is £100,000, they will only include bonus income of up to £100,000 regardless of the actual amount. Not only that, they generally account for only half of that bonus when measuring income.
In this scenario the maximum total income the lender will use in their multiple calculations is £150,000 (£100k salary and £50k = half the bonus). This does limit the borrowing capacity of high bonus clients.
Many of the main High Street banks adopt the same policy which is to take half of a two-year average of the bonus as long as that bonus is increasing. That average, even if it is more than the basic salary, is then used as part of the affordability based income multiplier. These type of lenders do require at least a two year bonus track record with the same employer and this income must generally be paid in sterling
However as a broker that specialises in clients with complex income we have access to bespoke lenders that consider 100% of bonus payments.
We have also lenders that will look at vesting shares, bonus over a two year period from two separate employers and bonus that is not received in sterling amongst many other scenarios.
If you’re in this high bonus category, the key is to speak to a broker that specialises in higher or complex lending. We're always happy to have an informal chat to talk you through your options.