I was approached by a client a few months ago who had recently been made a partner at a law firm. As with a majority of legal firms, this was an LLP (limited liability partnership). He wanted to review his current mortgage and was concerned that he would face difficulties due to the change in his employment status.
It is important to understand that in the eyes of a lender, once you become a partner, you are no longer an employee of the company and are classed as self-employed. This usually means that you need to provide evidence of three years’ worth of self-employed income to secure a mortgage.
Fortunately for this client, I have past experience with similar situations and an understanding of how partners are remunerated. As a rule, there is an expected increase in income year on year once someone attains partner level, and with this knowledge I was able to source a competitive mortgage.
The lender required evidence of income via a P60 showing the previous year’s income and a letter from the practice manager outlining the client’s first year income as a partner covering base monthly income and annual partnership share and bonus. With this information, I was able to secure a rate of 1.34% fixed for 2 years.
I also looked at the possibility of structuring the mortgage on an interest only or a part and part basis. This would maintain the monthly low costs at the outset with the availability of making capital reductions of up to 10% of the value of the mortgage from annual partnership lump sums. It is important to understand that interest only mortgages can be risky and you will pay more in interest over the term of the mortgage. However, when your income is lumpy due to annual bonus payments or partnership share, it can help manage the monthly cost of the mortgage.
Another important thing to consider when you become a partner is the loss of benefits. Make sure you have a full understanding of what insurances are on offer as part of your partnership agreement and that you are not underinsured. As your income increases over the years and your outgoings also increase with bigger houses, more expensive cars and private school fees, it is important to make sure your family are fully covered should the worse happen.
As always, get in touch if you’d like to talk through your personal situation.