Complex Income

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The content contained within was correct at the time of publication but is subject to change 12/12/2023.

Complex Income

Complex Income

Richard Campo explains how best to navigate mortgages if you have complex income.

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

The funny thing is you often don’t know you’ve got a complex income until you come to get a mortgage.

If you’re employed, you’re only using your basic salary and you have no other outgoings, that’s nice and straightforward. But 99% of people have something more complicated going on.

Things are probably more on the complex side for anyone who’s self-employed – whether as a sole trader, limited company or LLP. If those things apply to you, we’ve done specific podcasts on these so I urge you to listen to those. The same goes if you’re a day rate contractor, subcontractor or anyone on a fixed term contract.

Even if you are employed, life can get complicated if you have variable income through annual bonuses, quarterly or monthly commissions. It can be even more complex if you have a vesting stock schedule or you have carry in the private equity world.

Certainly in top jobs you might have a blend of these things and a number of income sources. There’s also a very technical area around earned and unearned income. Everything I’ve mentioned is earned income – and banks usually take those into account.

Unearned income is things like investment income and property income, where it’s not effectively a job but you have a passive form of income. You’d think that’s a good thing, but some banks are nervous about that for various reasons.

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

Probably the most common challenges in how things are assessed are for limited companies. We deal with those a lot, whether you’re a contractor or self-employed or run a business.

Banks tend to take your basic salary, dividends or your profit. They don’t always take all of those things because they overlap slightly. With limited companies, if you don’t draw the income, some banks take that into account – whereas others don’t.

It’s one of those catch 22s when you’re self-employed – you want to minimise your tax right up until you get a mortgage, when you need to show a good income. But there are lots of ways around that.

We see a lot of LLP partners, particularly in professions like law. In the investment world we tend to work on your drawings. For contractors there are easy ways around it by looking at your day rate.

Tying all that together, your income is really what you pay tax on – that’s what banks will take into the assessment.

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

The actual documentation varies depending on the lender and the structure you’re under. They are very different. A contractor might need a contract, a limited company might need accounts and an LLP partner might need their drawings.

It also depends how long you’ve done it for – this is a key driver around any complex income. The longer you’ve done it, the better. Most banks are happy to place you if you have a two year track record. If you’ve done more than three, that brings in the whole market.

The minimum is one year, particularly if you’re self-employed. In some professions there may be some certain exceptions, so the longer the track record, the better. In terms of documentation, there’s a great document called your SA302 which is your end of year tax return – it shows a neat breakdown of income. Pretty much all lenders accept that.

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What challenges might arise during the mortgage application process when declaring complex income?

It’s really the definition of income. For example, with a limited company, one bank will work on salary and dividends while another bank will work on profit. A couple work on ‘profit on ordinary activities before tax,’ which is actually a true reflection of the profitability of the business.

So with one limited company there could be three or four different ways of assessing it and that’s often the biggest challenge. Your tax return is a nice easy way around it and, for contractors, using a day rate calculation is helpful as well.

I could talk to you for hours about the different income structures, so if this is relevant to you, let’s sit down and work out what’s best for you.

How do I improve my chances of getting approved for a mortgage with complex income?

The big one is the track record, as I touched on. It’s not a show stopper but it certainly helps.

Then it’s all the classics. The bigger the deposit, typically the lower interest rate you get and the more options around lenders and criteria. Making sure your credit file is up to date and paying your bills on time is also a big one.

Real life does happen, though, and banks are more understanding about past credit blips than you might think. Again, just talk to us if you have any credit issues.

A very specific thing to London, where we’re primarily based, is about your address history. You might have moved around – that’s quite common. In my 20s I lived in three places in three years – and the address format can be really different.

Flat One, Garden Flat, or Lower Ground Flat might all be the same address. But if that’s not neat and tidy on your credit file you can actually fail a scoring – because the bank can’t find your profile. That’s something we’re very aware of.

If you’re gearing up to get a mortgage, sign on to one of the big credit reference agencies and make sure there’s nothing there that shouldn’t be. Some institutions might register bad credit against you incorrectly. Give yourself time to iron that out before applying for a mortgage.

Scroll down to the bottom and look at your address formats. Do they match? Are they the same, is your current address there? If you’ve got everything going to your parents’ house, move it to where you are now. The address is a far bigger aspect than people think, but it’s really easy to fix.

Do any mortgage lenders specialise in mortgages for customers with complex income?

We do have specialist lenders for self-employed clients and for people who have had credit issues in the past.

You might find that one bank really understands barristers, for example – that’s always a complicated one. A lot of people in the tech sector have a vesting stock schedule as part of their remuneration package, and you’re paid bonuses in shares as much as cash. There might be a main high street bank that likes that.

Our job is really to marry the right person with the right bank. It’s that classic thing of putting square pegs in square holes. Where people get it wrong is trying to force it through – that just doesn’t work with mortgages. There are absolutely specialist players. We know what banks we can play with and what underwriters want. The matchmaking is really the skill.

How can I calculate my borrowing capacity when I have complex income? Does it differ from regular income?

It certainly does. We touched on limited companies, LLP, etc. so listen to those podcasts because I’ve done a couple of worked examples.

With bonuses, the assessment is really cute. Some banks will only take half of your average bonus. Some will take 100% of the average. Some banks will lend you four and a half times your income, some will lend you six times your income.

It all depends on that mix – what income is assessed, what goes into the affordability model and that varies by lender and also in time. Just because a lender does it today doesn’t mean they will do it in the future.

The key document is the SA302 – it’s very neatly laid out. You can see what your total income is, and that’s a good place to start. You can punch that into an affordability calculator for a good idea of what you can borrow.

Take your total income, times that by 4.5 and pretty much that’s what the market will offer you. You do need to factor in outgoings – it isn’t just about your income. It’s things like childcare, school fees. To get into the details, it’s best to speak to an advisor – we can work out exactly what that figure is for you.

How can a mortgage broker help with complex income?

Ironically, we see most clients in this area after they’ve gone to their bank and been rejected. They think their bank knows them. But in fact, a specific piece of legislation called the Mortgage Market Review from 2014 means that every bank has to treat you as a new borrower.

Even if your mortgage is already with them, things change. You might be a solicitor where you started as employed and are now self-employed. Nothing is guaranteed, so make it simpler and easier by seeing a broker – we will find the most suitable lender for your complex situation.

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 12/12/2023.