Mortgage affordability | Self-employed, bonus, commission
In light of what has happened since the onset of COVID-19, it is no surprise that lenders are tightening their belts on what are perceived to be high risk areas, so called ‘mortgage affordability’. In recent weeks, lenders have really pulled back on ‘affordability’ or in layman’s terms – lenders are lending less.
This is extremely important if you are looking at moving home or remortgage, as one of the first things you want to look at in that situation is – how much will a bank lend me?
Below I have highlighted some recent changes that may or may not, affect you. (See also a recent article in the FT.) As these are quite big, recent changes, now more than ever, getting quality advice before proceeding is essential.
What has changed?
Just a few weeks ago, when considering mortgage affordability, obtaining a mortgage for 5.5x your income was quite achievable. However, this has been pulled back as far as 4.5x as a few key lenders have withdrawn from offering 5.5x.
That is not to say it is not possible, but the criteria has tightened.
So for example, if you earn over £100,000 and looking to borrow 60% or less of your property’s value, then 5.5x is still very much achievable. But if you fall short of one or both of those points you may have to lower your expectations of what is possible.
Does this affect how my bonus is considered?
Yes and no. Pretty much since the start of lockdown, lenders have been hesitant to consider any ‘variable income’, things like bonuses and commission, when considering mortgage affordability. So some lenders simply do not include any at all at present. Which if you earn a £100k basic and have a £100k bonus, that hugely reduces your borrowing capacity as the £100k bonus is simply ignored!
As ever, that isn’t the case for every lender and the beauty of being a broker is that we have the entire market to choose from. So if you need to use your bonus to achieve the lending you require, we simply talk to the lenders who are open to this.
How bonuses and commission are treated so widely vary. Some lenders only include 30% of the additional income, some lenders 100%, which has a huge impact.
Bonus lending example
So sticking on the same example for the easy maths, using the example above. (£100k basic and £100k bonus), these are the range of outcomes you are likely to see:
- Using basic only, max mortgage = £450k
- £550k depending on the lender and deposit level
- Including bonus, max mortgage = £585k
- £1.1m depending on the lender and the deposit level
As you can see, this makes a huge difference! Especially when you look at moving home, this has a huge impact on what you can buy for.
Equally, if you are looking at your remortgage and used your bonus last time out to secure your mortgage this could also become problematic.
Of the lenders that are including variable income, the case is still individually underwritten. Again, this is where a broker can really help as we know how to present the right case, to the right lender, to get you the right outcome.
The advantage of interest rates being so low is that it doesn’t really matter what high street lender you go to, as they are all offering extremely cheap mortgages. But what is essential is that you talk to the right lender to avoid you wasting weeks/months to only be told things aren’t going to work.
I am self-employed, does this affect me?
Again, yes and no. Pretty much every person who is self employed right now has the mortgage underwritten, as previously it was more of an automated process. And just like the bonus, as a broker, we can help present your case well to the right lender.
The ‘mortgage affordability’ hasn’t really changed much for self-employed clients and the lending brackets above are still valid, so you can borrow between 4.5-5.5x your income. But what lenders take as income when you are self employed varies and the first hurdle to overcome how is – is your income sustainable?
So if you are in a ‘high risk sector’ such as entertainment/hospitality/the arts etc, we will need a personal rationale as to why you are/are not affected by Covid and what impact that has had on your income.
Again for ease, if your income was £100k last year, but you expect business to be half next year, expect lenders to only include half your income. Underwriters are looking at business bank statements now to try to gauge what level of turnover is happening now to vs pre-Covid. So if your income is back to the previous level, all good, if not, we will need to present accordingly.
Self employed – what income is included
The main difference from being self employed when getting a mortgage is what income is include, so for ease, I summarise it as – lenders take one, some or all of the following:
- Net Profit
- Profit on ordinary activities before tax
Most commonly lenders take Salary & Dividends when looking at what mortgage they will offer, but as I say, not all lenders take this approach. In fact the lenders that look at ‘Profit on ordinary activities before tax’ are often the best to use if you have a well performing company and want to max out your borrowing (says the company owner…).
Do any debts I have affect my ability to get a mortgage?
In a word – yes. While it doesn’t affect you being approved or not (on the assumption that you have made all your payments. Even if you have had the odd blip, lenders are able to take a view if we can explain why. They do live in the real world and understand mistakes or events happen which can throw you off track occasionally), it does affect how much you can borrow.
Again, for a simple rule of thumb – whatever you pay each month in any debts/outgoings that will continue past when the mortgage comes into effect, that is annualised and taken off your income. So again, using the same example:
- Outgoings of £1.5k nursey fees + a car loan of £250 per month (£21,000 per annum)
- Means your income will be assessed as £79,000
Therefore a mortgage of £355,500-£434,500 will be offered depending on the lender and amount of deposit you have.
So now you understand the complex world of affordability in mortgages!
Essential to talk to an adviser
Depending on your objectives, it really is essential to talk to an adviser that has access to the whole market. Your bank of many years that you know and love, may have been badly affected by Covid and through changes in ‘mortgage affordability’ may not offer you the best terms or loan amount. So it makes sense to look over the fence to what else is available and a broker is your best and easiest way of doing that as we have access to lenders, products and underwriters that the general public simply do not.
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Rose Capital Partners Limited is an appointed representative of PRIMIS Mortgage Network, a trading name of Advance Mortgage Funding Limited which is authorised and regulated by the Financial Conduct Authority.