Mortgage affordability, the amount of mortgage you’re eligible for, is primarily dependent on your household income. Your expenses, the term of the mortgage and any children/dependents are factors that can have a big impact on the amount available, but the driving factor is your income. Mortgage lenders, banks and building societies alike, recognise that not everyone’s income comes solely from salary or self-employed income. Whether it’s benefit income, pension income, rental income or various other allowable income types, many of these can be used in the affordability calculation, depending on the lender.
The first thing to mention is when the bank is deciding whether to use an income source, they aren’t just picking and choosing what to use on a whim. They’re generally looking for two things. A track-record of this income and the sustainability of it going forwards. While winning a few quid betting on England in the Euros is great, it’s (unfortunately) not a sustainable source of income and there’s definitely no recent history of it either!
Across all mortgage lenders, there are over 100 types of income that can be considered. Therefore, in this blog we’ll focus on the most commonly occurring types.
Employed individuals often have variable bonus, overtime and commission on their payslips. For some individuals this can be small but for some it makes up a major proportion of their income. It is common for lenders to use 50% of this income and no amount exceeding your contracted hours. However, there are lenders who will use 100% of it so this can be an option where necessary.
Secondary income. It is not uncommon for people to work two jobs and have multiple sources of income. Whether this is two part-time jobs, one full-time and one part-time or people who work a full-time job and have a self-employed income revenue on the side. The lender’s primary concern here will be the sustainability of what you’re doing. If they view it as unsustainable, they’ll likely only use one of the income streams. If your secondary income is self-employed, most will want two years figures to verify this as standard.
Child maintenance payments are common between separated/divorced couples with children where one party is paying the other for having primary care of the children. The amount paid is often court ordered but can be agreed outside of court. There are lenders who will only accept the income if it is court ordered due to confidence in the sustainability of the income. Once again, some lenders will use 100% of the income and some will only use 50% of it.
Pension income can be used for mortgage affordability providing the appropriate documents can be provided. This will be a combination of pension statements, payslips, bank statements and P60s, depending on the specific lender. Whether it is a company pension, private pension or state pension, most banks will use 100% of this income for affordability. However, there are a handful of lenders who will only use the pension income providing there is another source of income to support the application.
Benefit income. From child benefit to universal credit, there are many different types of income that fall under the umbrella of benefit income. Mortgage lenders do not categorise all these as benefit income and therefore will only accept some forms to be used for the affordability calculation. In terms of verifying this income, bank statements and benefit award letters are generally required. If you are someone who receives a type of benefit income, you want to know how it will be considered in a mortgage application and what proportion of it can be used, it’s worth getting in touch.
Rental income from owning property is commonly treated as self-employed income and most lenders will therefore assess it as such. Typically, two years’ tax calculations and tax year overviews would be required. If the rental properties are held within a limited company, the lender may also want two years’ company accounts. A positive about rental income is most lenders will use 100% of the figures showing on the supporting documentation in the affordability calculation.
As is always the case, any income declared must be fully evidenced in line with lender underwriting criteria and we’re able to go through this with you. If there’s a source, we haven’t mentioned that’s relevant for you, feel free to get in touch. We can discuss how it will likely be treated, which lenders will use it and what’s most appropriate given your overall circumstances.