Complex Income

Podcast approved by The Openwork Partnership on 07/10/2024

What is considered as complex income when it comes to mortgage applications in the UK? 

The most basic form of income we can use for a mortgage application is from a standard, employed, permanent role, with PAYE on a basic salary.

Lenders will always use 100% of that to calculate your borrowing. Anything beyond that could be considered complex, but typical examples are multiple sources of income, or variable elements of pay. 

Perhaps in addition to basic pay, you’ve got bonuses or commission. It’s especially complex when those variable elements of pay are greater than your basic. We do see that quite a lot with people working in financial services. 

You might have elements of pay that are denominated in foreign currencies, which also adds a level of complexity to the case. You might have bonuses that are awarded as shares, whether they be vested or not. Restricted stock units (RSUs) are becoming popular, especially with the tech companies.

Self-employed income can be slightly more complex in that they’re looking for more of a track record than just a figure you’re earning right now. You might be running multiple businesses within one company structure, which can add complexity. 

You might have income from investments. Income can be generated from stocks and shares, dividends or property portfolios. There are lots of different things that lenders would consider as complex.

How do lenders assess different complex incomes and how do they impact the mortgage assessment process?

Every lender has its own written policy and criteria, and that includes the treatment of income. It’s going to vary lender to lender. 

WIth a source of income from a second job, for example, most lenders want you to have been in that role for at least six months alongside your main job, to confirm it’s sustainable. Generally speaking, lenders are always looking for consistency. 

For variable elements of pay, most take some sort of average. With annual bonuses, for example, it might be a two-year average. If it’s monthly bonuses, they might look at the last three months. It varies depending on the lender. 

What also varies is how much of that income they’ll use. Some will use only 50% to account for the volatility. Some are more generous and might use up to 100% of it, depending on the circumstances. 

Foreign currency income is a bit more restricted. Not many lenders will look at that, and the ones that do might take what they call a ‘haircut’. They’ll look at the exchange rate and knock off maybe 10% or 25% to account for fluctuations in the exchange rate.

With vested shares and RSUs, the mainstream lenders are a bit behind. It’s a bit new and scary for them, and which is understandable. They’re there to assess risk, and if it’s something new they’re not familiar with, they tend to take a cautious approach.

Mainstream lenders will want that income to have vested, and may need you to have cashed in those shares. But private banks are a bit further ahead. Their view is that whether you want to cash in is up to you. They appreciate that if the value is increasing, there’s no reason to sell unless you actually need the funds. 

Self-employed income, again, varies lender to lender. Some will look at the latest year only, but the majority take an average of the last two years. Again, it’s about consistency, making sure you’re likely to earn that level of income throughout the mortgage term and that borrowing the money is affordable.

A sole trader, partner, or a limited company director will all be treated differently. For example, for limited company directors, lenders might just look at the salary and dividends you take, whereas some might look at your salary plus your share of the net profits. Their approach is that you could withdraw that money, you just chose not to.

With income from investments, there are different ways that can be treated. It might be taken from tax calculations for the last couple of years. It might be more straightforward, though. Some just look at the percentage of that investment portfolio and take perhaps 5% of that as an annual income figure. 

With others, if you’ve got £1 million in assets they’ll take your mortgage term and divide it by that total. Let’s say you’ve got a ten year mortgage term – that’s a £100,000 a year they can treat as your income. It varies massively between lenders. Private banks tend to take the most understanding and personalised approach, and have minimum requirements of usually about £1 million in lending.

What documentation and evidence do I need to provide to prove my complex income? 

If we’re looking at second jobs, bonuses and commissions, or anything generated from your employment, we need payslips and possibly P60s. That’s fairly straightforward.

Even with foreign currency income, if your pay slip’s denominated in a foreign currency, we just convert that figure for the application, and the lender will take a haircut if required. 

If you’re self-employed or you’ve got income from investments, lenders want to see the track record, which involves tax calculations or business accounts for the last two years. They might want to see a portfolio statement for your investments, or a letter from whoever you’ve got managing those assets to confirm the amounts.