Your income is the predominant factor which determines how much a bank will lend to you. Evidencing income through the appropriate documentation is vital to ensure the lender will use the necessary income figures for the mortgage affordability calculations.
In most scenarios, a lender will allow you a mortgage of 4.5 up to 5 times your annual household income. The income multiple used is typically dependent on your level of income and the loan-to-value (LTV) of your purchase or remortgage. Higher or lower multiples can be used although this is less common. The maximum borrowing amount may also be reduced subject to your level of expenses and number of dependents.
So what documents are required for evidencing income? The answers are simple, it just has to be done right!
For those who are employed, most lenders will ask to see the latest payslip. While a minority still ask to see three months of payslips, it is a common misconception that this is a minimum requirement. A decent number of lenders are even happy to lend off an employment contract if you have not yet started the job. Providing the payslips support the income declared, lenders will accept this as suitable evidence for verifying the income.
Additional income received by employed individuals such as bonus, overtime and commission can also be verified via payslips. The number of payslips required and how the additional income will be treated can vary significantly from lender to lender. The typical approach is to use an average of additional income received over a specified number of months. P60 documents may also be requested in these circumstances. Any income not shown on payslips, such as cash in hand, cannot be used for mortgage purposes if it is not declared to HMRC.
For those who are self-employed, tax calculations and tax year overviews, along with business bank statements, are the standard requirements for evidencing income declared. A tax calculation is a summary of your tax return. It shows your income for the tax year and therefore your tax liability. A tax year overview confirms the tax you have paid. These two documents must match to evidence you have paid the correct amount of tax based on your income. If you complete your own self-assessment, you should be able to access these documents from HMRC. If you use an accountant, they will be able to get them for you. Business bank statements are generally requested to support the current sustainability of your business.
For limited company directors, the documents required will be dependent on the lender applied to. Tax calculations and tax year overviews are required to verify salary and dividends received. Company accounts are required to verify net profit figures for the business. Business bank statements are also typically requested here too.
Self-employed individuals and limited company directors are often looking for ways to reduce their tax liability. Whether it’s legal tax avoidance or illegal tax evasion, manipulating your figures to show a reduced level of income/profit means how much you can borrow on a mortgage will be reduced too. Mortgage lenders will only treat your income as what you declare to HMRC.
Other sources of income are available! Benefit income, maintenance income, rental income, investment income or various other sources can also be used when applying for a mortgage. The larger the income, the more that can be borrowed. For more information on income types, topics discussed in this blog or any other mortgage or insurance queries, we’re here to help with free, professional advice.