If I had a pound for every time a client repeated a mortgage ‘fact’ heard from a friend that is simply not true, then I would be sunning myself on a beach somewhere rather than writing this blog.
Last week I spoke to three Recruitment Consultants looking to secure mortgage finance. All three had been given different information by colleagues or friends regarding how lenders view commission and none of it was true.
Recruitment Consultants and Head Hunters tend to get a reasonable basic salary but the bulk of their income is gained from commission or bonus, which by its nature can vary month to month.
So, let me dispel a few of those mortgage rumours right now.
Rumour 1: You need a two or three-year track record as a recruiter before a bank will lend against commission or bonus based income.
A track record does help but it is far from essential.
The truth here of course varies from lender to lender. There are a number of High Street lenders who take an average of the last three months’ commission and then check this against the year to date or most recent P60 figure to make sure the client has not just had one huge sale that has given them an artificially high average.
For example, if a Consultant’s commission earnings over the past three months were £3000, £4000 and £5000, a typical High Street lender would take a three-month average (giving us a starting figure of £4,000).
As commission is not guaranteed income, lenders usually take 50% of the three-month average which would be £2,000 in this example. That £2,000 is multiplied by twelve to give a figure of £24k for the year. The £24k, when added to the basic salary, is the figure lenders’ use as total income.
In this situation, a good mortgage broker can help you by knowing which lenders offer competitive rates and lend against 100% of bonus or commission income.
A lender considering 100% of bonus would use the £3k commission month above, as it is the lowest figure. They would then multiply by twelve to get to £36k. The difference between this method and the typical bank method is £12k which when multiplied by up to 5x income* could mean an extra £60k of borrowing in real terms just by picking the right lender (and broker).
Rumour 2: Recruiters can only borrow off the back of three strong months’ commission.
My clients working in recruitment tell me the summer months can be slow. Candidates, HR people and maybe even the recruiter is off on holiday. It is a common myth amongst recruiters that you should only apply for a mortgage when you have had three strong months. This may be true when borrowing from a typical high street bank but it’s not always the case. There are a number of bespoke lenders that don’t use a computer to make a decision; they use an underwriter and take a common-sense view.
Often, if a client can show their earnings on a P60 for the previous few years, we can source a mortgage based on their income over the year, not just three months.
After all, if the client were self-employed, the lender would only look at annual figures and would have no idea of any peaks and troughs in earnings throughout the year. Knowing the right firm and underwriter is essential here as this is not generally how the mainstream lenders work.
Rumour 3: You cannot change jobs in the year or two before you want to apply for a mortgage.
Again - not true. If you are good at recruitment the chances are you will still be good at recruitment in a new role.
Whilst High Street lenders do typically use the preceding three-months calculation, other banks take a more bespoke view and will look at a client’s track record and past earnings. The rates from these banks are typically 0.10% to 0.20% higher than the mainstream lenders but there is a better chance of approval using common-sense rather than just a computer calculation.
Personally, I really enjoy working for Recruiters and Head Hunters and dispelling some of the myths around commission and bonus. The same rules apply for most commission or bonus based roles.
When you’re looking for a job, you choose a Recruitment Consultant that understands your market and your circumstances. It’s equally important to pick a mortgage broker that can do the same. Find a mortgage broker who can explain your options in full as they may be wider than you think.
* Lenders don’t just use a multiple of income calculation – they look at affordability and will take off debts and other commitments to calculate the final figure.