For many new clients that I meet, there appears to be a few misconceptions with regards to bonus and how your average high street lender will view annual bonus payments when making a lending decision. I can help with these so please read on…
Fundamentally high street lenders come into one of three camps.
No bonus: there are still a few lenders out there that don’t take bonus into consideration at all.
Two-year average: most of the high street would look at an average of the last two year’s cash element of the bonus. They would then add between 50% - 65% of that average to the client’s base salary before applying an income multiplier of between 4.5x - 5.5x.
Most recent year only: there are a couple of lenders that only look at the most recent years bonus. This is very handy for people that have changed jobs and only have one year’s annual salary to show with a new employer. These lenders again typically take between 50% - 60% off the most recent year's bonus into account. They add that to the base salary, before applying an income multiplier; again of 4.5x and 5.5x.
Most of the high street will only lend against a cash bonus that has been paid. So, for clients that have shares that vest in the future, this element is not a great deal of use in helping a client to borrow money. The private banks will generally take vesting shares into account as part of the client’s total compensation package. However; the fees and rates with these banks tend to discourage clients in the city.
If there is a good reason why your bonus has increased significantly from the previous year, we can potentially speak to an underwriter about using the most recent year, rather than a two-year average. We often do this for people that have recently left a graduate scheme and are now getting a significant bonus, compared to their time employed under the graduate scheme.
In a perfect world, the bonus would always be paid in sterling. Most of the high street will not lend against non-GBP bonus, however there are a couple of good high street lenders that will consider this.
Guaranteed bonus is becoming increasingly rare in the City. However; if you are fortunate enough to have a guaranteed bonus which has often been awarded to replace a bonus at a previous employer, then there are some good high street lenders that will lend against that form of income up to 100% of payment.
Finally, if your bonus wasn’t quite what you’re expecting and it’s time for a change, there is a real misconception in the market that you need a long period of time at a new employer before you can apply for a mortgage. This is simply not the case. There are several high street lenders that view having a signed contract, which confirms your new basic salary and start date within the next three months, as enough to secure lending decision.
By the way, I’ve pre-warned Mrs Baker that I may not be around much this month due to a very busy calendar. In honesty it’s a exciting period for me personally because there’s no better feeling than helping your client into their dream home or to finally do that extension they have been planning for years.
No matter what your situation, it would be good to talk to a broker that understands the city market and can give you the best advice possible so don’t hesitate to contact me.