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Can you get a mortgage on a commission based job?
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The content contained within was correct at the time of publication but is subject to change 08/12/2023.
Can you get a mortgage on a commission based job?
Richard Campo talks us through getting a mortgage with commission income.
How does commission work for a mortgage?
The answer is, it hugely varies. What you tend to find is that all banks assess all income in different ways. That’s why it’s complicated, particularly when you have got commission as part of the mortgage application.
Predominantly, most banks will look at the last three months’ commission. That’s quite important. If you miss one, or if there are big variances, it can be problematic, so the last three months is the key barometer.
Then, a lot of banks would look at things like your P60, because that captures all your income. If you do have a two-year average of earnings, that’s really helpful. So the key three things are your three months’ commission, your P60, and your two-year average income if applicable.
Outside of that, there are some very complicated rules. So, for example, if your commission exceeds your basic, not all banks like that. Not all banks treat income the same, either, we’ll come on to.
What counts towards income for a mortgage?
It’s a good question. When people talk about commission, bonuses and things, it doesn’t always mean the same thing to the same people. The rule I always use when explaining this is any taxable income is allowable.
If you get some sort of bonus paid, such as vesting stock, which some do, especially in the tax sector these days and banking, it’s always been that way as well because it’s not taxable in a traditional sense. That’s why some banks don’t include it as income.
The golden rule is always anything taxable, but even things like vesting stock and carry, and maybe even shareholders in businesses can be taken into account, but not in a traditional way. We might have to find a lender that’s more in tune with that way of assessing income.
Are dividend clusters a type of commission?
That’s exactly the point I alluded to – people call things different names. Strictly speaking, dividends aren’t considered commission, even though they might be paid as such.
Dividends, when paid out from a limited company, are treated differently, often more favourably. Some banks may even perform a “grossing up” calculation, adding back the tax when assessing dividend income. So, while dividends aren’t classified as commission, they are 100% income because you’re paying tax – that’s the golden rule. Depending on the lender and how much you want to borrow, we can factor that into how we determine the loan amount you need.
Does overtime count towards the mortgage?
The golden rule is if you pay tax on it, it’s fine. It’s treated the same as commission. Sometimes, overtime is a very regular feature of work. For example, we have many doctors as clients. If you’re a doctor in London, you often have a lot of overtime; it’s just standard.
So, again, taking a three-month or annual average is absolutely treated as any form of income.
Should I include a bonus on the mortgage application?
I’ll give you a funny answer; I’ll say only if it’s needed. This question often comes up with our clients. Sometimes they simply don’t need the bonus to meet their borrowing requirements, so we politely tell them it doesn’t matter.
While a nice bonus is income and something to be proud of, it can trigger a lot of rules like a two-year average or a three-year history. What we typically need to see is a two-year track record of bonuses; some banks work with a one-year track record, and some need three.
If it is required, by all means, include it; if it’s not, just leave it aside. I’m a big fan of taking the path of least resistance. If there’s an easier way to achieve your goals, let’s take it.
How do you calculate commission income?
This is where it gets complicated. How you calculate it varies from lender to lender. Most lenders take your last three months’ average commission. The assessment usually involves taking your last three months’ commission payments, dividing them by three, and then multiplying by 12 to get an annual figure.
However, most banks typically include only half of that figure when assessing your income. They add it back to your basic salary before determining how much you can borrow. Some banks may go up to 100% of your commission income, which is why it varies.
But again it goes back to the point around what’s required and how much detail we need to get into. If you don’t need to borrow a huge sum and the cheaper, standard lenders are available to you, great. If there’s a possibility of getting a cheaper deal we will go down this route.
To a large extent it is our job to worry about that, but that’s broadly how it’s treated.
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What mortgage can I get on a £40,000 salary when my OTE is £100,000?
Firstly, OTE (On Target Earnings) is lovely, but we want to see a track record. We appreciate that if you’re consistently meeting those figures, that’s great, but if you’ve just started a new job and it’s a projection for the future, it might be more problematic. But depending on your background, it might work out.
But what I do is take it as read. Let’s say, for example, you’ve got a job with a £40,000 basic salary and you’re expecting £60,000 commission. Some banks will cap the commission at the level of the basic. They will only include £40,000 in the assessment, even though you get £60,000.
However, the standard assessment is that most banks would take 50% of your commission. They’ll actually include £30,000 in our example and add that to your basic, taking you to an income of £70,000.
You can often borrow about four and a half times your income, so you get a loan amount of around £315,000.
What I would call ‘enhanced’ criteria is where banks include 100% of your commission. In our example, then, with 100 % of your commission you then earn £100,000 a year which is more favourable from the affordability point of view.
Because of that, most banks will offer you five times your income – that’s £500,000. So Lender A will offer you £315,000 while Lender B will offer you £500,000. But if you only need to borrow £300,000 it’s irrelevant, whereas if you need to borrow £450000 it becomes extremely relevant. As you can see, there’s a huge range of outcomes, even with the same income.
What base salary do you need for an £800,000 house in the UK and how could my commission help?
So, being slightly facetious, it’s almost impossible to answer that question because to determine the salary you need for an £800,000 house, we also need to know the deposit amount.
For argument’s sake, let’s say you want to borrow £800,000. You’d need an income of approximately £177,000 to borrow that amount, assuming a standard lender offering four and a half times your income. However, there’s a lot of variation in this assessment.
But there’s a range even within that. Your income might be £100,000 with commission of £77000. But the devil is in the detail – it’s about the level of commission, your track record and the level of deposit.
Some banks will offer you a lower multiple of your income, the smaller the deposit you have. If you have less than a 15% deposit, most banks are a bit more conservative. They might only offer you four and a half times your income.
If you’ve got more than 15% or certainly 25% deposit, most banks will offer you five times your income. So it’s those variances and those details that make a big difference in the lenders we go to.
What is the best income multiple for a mortgage?
As I said, there’s a range. There’s often a misconception that the cheapest lenders are the most conservative – but it doesn’t always go that way. Lenders tend to have a set policy, depending on pricing at the time. So you don’t have to go off piste to get bigger multiples.
If your income is up to about £75,000 a year, most banks offer you about four and a half times your income. If you earn between £75,000 to £100,000 most banks will offer you five times. From £100,000 to £150,000 you get up to five and a half times your income and if you’ve got a very high income, over £300,000, then you qualify as what’s called a high net worth individual.
The FCA then deems that you’re financially sophisticated and these rules don’t apply. There’s a lot more flexibility and you can probably go outside of that. But the devil is in the detail, as always.
Can I get a mortgage worth six times or seven times my salary?
I’ll give you the classic answer: it depends. It depends on a whole bunch of factors. What are we classifying as income? How high is your income? What’s your deposit?
I’ve often described lending as like a Venn diagram with three sides to it. You’ve got your profile or your income, and then the risk factors around it. In this specific instance, I want to understand the deposit, and if you want to borrow a very high multiple of your salary, you’re probably going to have to put down a 25% deposit plus.
The bigger the deposit, the further lenders will go because they’re taking less risk. If you stop paying, there’s more equity in the property and less risk for the bank of losing money on lending to you.
Second, we need to know what your income is. For a very high multiple, you’re going to need a fairly high income. You’re probably looking at an income of £150,000 plus. If you’re self-employed and you run a business, it may be that you don’t draw the income. And this is where it gets really muddy.
One of my clients has net profit in their business of close to a million pounds, but his salary is £12,000 for tax reasons. So we can get him a mortgage of 10 times his ‘salary’ because we’ve got access to the net profit.
You might have a vesting stock schedule. You might have other assets. So, it’s really around the makeup of the income. In short, the bigger the deposit and the income, the more this is possible.
How can a mortgage broker help?
It’s quite complicated when you have commission or any variable income. So whether you call it bonus, commission, overtime, dividends, when there’s a variable element to your income, it’s more complicated than it used to be.
If a bank takes all of that and you get a high multiple, it can actually be really beneficial, but where we add the most value in this process is if you’re pushing the borrowing.
We can just do the legwork for you. We know what banks do and it does change in time. Just because one lender was good at it two years ago, it doesn’t mean they are now. We can save a hell of a lot of time by going to the right bank at the right time and getting the right outcome.
The pricing is often secondary. There are often two drivers – do you want the cheapest lending or the most generous lending? They’re not the same. We can have that conversation at the outset and make sure we go down the right path.
We can make your life easy – if you are earning good sums of money, it’s more important to spend your time at work earning that money, not spending days and weeks chasing deals around the high street.
About 85% of mortgages all come through brokers these days. We get better access to underwriters plus exclusive products, so aside from just the time itself, brokers are worth a weight in gold
Your home may be repossessed if you do not keep up with your mortgage repayments.
The content contained within was correct at the time of publication but is subject to change 08/12/2023.