One of the challenges facing those who receive a significant part of their income from bonuses is convincing lenders to take this into account when arranging a mortgage. Lenders will generally include no more than 50% of bonus income into an affordability calculation, averaged over the last two to three years. Arranging a large mortgage using bonus income can therefore be difficult.
This was the problem faced by one of my recent clients. A successful banker, my client received an excellent basic salary, but also received an annual bonus in cash and vested shares, in addition to a car allowance. He had been a client of Enness' for many years and was now looking to purchase a large house in the beautiful countryside around London.
However, in order to achieve this, he would need to take an average of 75% of his bonus income over the last two years in order to secure the level of borrowing he required. An average of 50% of his last two bonuses would not be enough,
My client had been renting in London, but was the owner of a buy to let property which he had sold to provide the deposit for his new family home. He was looking to secure as high a loan to value (LTV) as he possibly could—in the region of 80%. From a bank’s perspective, the difference between 75% and 80% loan to value is quite significant. At 75%, all we needed to use for affordability was his basic and his cash bonus. At 80% LTV, stricter affordability criteria meant I needed to think more creatively.
After carefully considering the structure of his income, I, therefore, negotiated with the lender to use a proportion of his vested shares, 50% of his cash bonus, and his car allowance, when calculating his affordability. Taking this combined approach allowed us to secure the 80% LTV, a fantastic result. To give my client security in what his repayments would be, we arranged for a 5-year fixed rate of 2.39%.