Can commission and bonus income be used towards a mortgage?
Yes, they certainly can; almost all mortgage lenders will consider commission and bonus income for mortgage affordability. However, some lenders will treat this type of income more favourably than others.
Lenders will want to see consistency with commission and overtime income, however, the requirements will vary amongst lenders.
If you’re in receipt of commission income, the amount you can borrow from one lender to the next can vary hugely.
How do mortgage lenders assess commission income?
If you’re looking to use commission income towards your mortgage affordability, as an absolute minimum, lenders will require a minimum 3 months of employment with your current employer.
Of the lenders that may consider after 3 months, most will insist on the commission being present on each of the most recent payslips, however some will consider with it only being on two of the three payslips.
Lenders will then usually take an average of the commission over a certain period of time. Most lenders average your commission over the most recent 3 or 6-month payslips, although some average over 12 months or two years.
If your commission income fluctuates throughout the year, it’s important to find a lender who averages payslips over a period of time that works best for you. For example, if you’re going through a particularly quiet sales period at the time of applying for a mortgage, using a lender who uses the most recent 3-month average may not have the best outcome.
If your recent 3-month payslips are not a fair reflection of your annual earnings, finding a lender that averages over a longer period of time, e.g. 6, 12 or 24 months, may have a better outcome. The reverse is true, if your sales are on an upward trend and you’re earning much more commission now than you have been previously, a lender averaging over a lesser period of time may work better for you.
How much of my commission income will mortgage lenders use?
Some lenders are more generous than others when it comes to using commission income for a mortgage. For example, some mortgage lenders will use 100% of the commission income for mortgage affordability, others may be more conservative and use 50-65%, some may consider even less than this.
Choosing a lender that looks more positively at your commission income can make a massive difference.
Commission-based income example
- Basic salary – £25,000
- December commission – £2,200
- November commission – £2,700
- October commission – £700
- September commission £1,400
- August commission – £500
- July commission – £900
3-month average – £1,866.66 (£22,400pa)
6-month average – £1,400 (£16,800 pa)
Let’s assume this customer could secure a mortgage at 4.5 times his income. Using the examples below you can see that the same customer could potentially borrow an extra £63,000 with another lender who assesses their income differently.
Accepts 100% average of the most recent 3 months commission + 100% of basic salary.
(£22,400 + £25,000) x 4.5 = £213,300 mortgage.
Accepts 50% average of the most recent 6 months commission overtime + 100% of basic salary x 4.5
(£8,400 + £25,000) x 4.5 = £150,300 mortgage.
Lender 1 would lend a whopping £63,000 more than lender 2, this is because they are using all of commission income instead of 50% and the period, they average over has worked more favourably than lender 2.
Commission – year-to-date or P60 checks
Whilst it’s common for mortgage lenders to accept a 3-month average of a customer’s commission, some lenders conduct ‘sense checks’ to ensure the payslips are a fair reflection of the customers earnings.
For example, a customer earns an annual basic salary of £20,000 and has been earning around £1,000 in monthly commission for the past 3 months.
Some lenders will annualise the commission and treat as £12,000 income. They may use all the commission income or sometimes a percentage of it income into consideration.
In this scenario the total annualised income for this customer when using a 3-month average would be £32,000. (Basic salary + annualised commission)
Some lenders will then cross reference this with your P60 or your year-to-date earnings.
If the income earned over your 3-month average is not reflected on your P60, lenders may choose to take the lower earnings on the P60 or use a smaller percentage of the commission.
This isn’t always the case but worth ensuring you check with the lender before applying. For example, Barclays take the latest 3-month average of your commission, if the figures are backed up by your P60, they will use 100% of the earning, if the income on the P60 is lower, they will only use 50% of the commission income, which can make a sizeable difference.
Salary cap – commission and bonus income
Some lenders will place a salary cap on the income used for commission. For example, the cap could be 50%, 75% or 100% of your salary and any commission above that amount would not be used in the affordability calculations.
For example, a customer has a £25,000 basic salary and earns £35,000 annually in commission.
If a lender caps commission at 100% of his salary, they would only use £25,000 salary and £25,000 of the commission income, the remaining commission income would be ignored for affordability.
Not all mortgage lenders have salary/commission caps, if your commission makes up a large proportion of your earnings, it’s worth avoiding those that have salary caps. A good mortgage broker would consider all these factors.
What if my commission changes before I apply for a mortgage?
Mortgage lenders base their lending decision at the point of full application, not agreement in principle.
For example, if you secure an agreement in principle in January but have an offer accepted on a property in May, the mortgage lender will use February, March and April’s payslips (assuming they use a 3-month average).
This could be significantly different from the figures used to secure your agreement in principle, it’s therefore worth updating your mortgage each time you get a new payslip before you find a property to see what impact it makes to affordability.
Just like with commission income, mortgage lenders will want to see a consistency of income and that it is sustainable.
Most mortgage lenders will insist that you have been in receipt of an annual bonus for a minimum of 2 years, however some will consider just 1 year.
Some lenders accept 100% of the bonus income and others will take a percentage, typically 50-60%.
If you have a longer track history of bonus income (e.g. 2 years) you will have access to more lenders that will accept 100% of your bonus income for mortgage affordability.
Most lenders will average the most recent 2 years annual bonuses or take the latest year if it’s on a decreasing trend. Some lenders will simply just look to use your latest years.
Lenders will only accept bonus income if it is part of an ongoing bonus scheme. For example, they will not accept a one off ‘signing on’ bonus when you join a company because this will not be a regular payment throughout the term of the mortgage.
If bonuses are contractually guaranteed lenders may require less history, however it’s fairly uncommon to see guaranteed bonuses.
Quarterly bonuses & half yearly bonuses
Criteria requirements on quarterly & half-yearly bonuses will differ between lenders.
Some will require 2 years on bonuses and take an average or two. Some will accept as little as 2 quarterly bonuses or 1 half-year bonus.
Just like with commission lenders will generally consider between 50-100% of the bonus income for mortgage affordability.
Which mortgage lenders are the best for using commission & bonuses?
This will depend on your own circumstances and the regularity of your commission.
- Nationwide will take 100% of the commission and usually accept a 3-month average
- Santander will take the lowest commission on your most recent 3 month’s payslips & use 100% or take an average of the 3 but use 65%
- Barclays will consider using 100% of commission using your latest 3 month’s payslips, however if the figures on your P60 do not match your recent 3 months payslip’s they will only accept 50%.
- NatWest will take 100% of commission income, they generally average the most recent 3- or 6-month’s payslips.
Other mainstream lenders like Halifax, TSB, HSBC, Accord will usually consider around 50-60% of commission income.
How can Strive Mortgages help?
It’s always important to shop around when it comes to securing the best mortgage deal, in particular, if your earnings are made up by commission or bonuses.
The amount you can borrow will vary hugely from lender to lender. Having an experienced broker like us on your side will give you the best possible chance of success with your application.
We’re an independent mortgage broker in Brighton & Hove, we offer in person appointments locally and available for telephone appointments for customers all over the UK.
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