Complex incomes needn’t complicate the mortgage process

Rob Oliver, director of distribution at Dudley Building Society, explores why additional income should no longer be treated as second-class.

Related topics:  Blogs,  Mortgages
Rob Oliver | Dudley Building Society
7th June 2024
Rob Oliver Dudley
"For these borrowers, a manual approach to underwriting might offer significant benefits, providing a more personalised assessment of what they can afford."

March is typically known as bonus month for those employees lucky enough to receive one.

Unfortunately, even after these bonuses are sitting in bank accounts, borrowers can be left disappointed when lenders do not factor them into mortgage affordability calculations.

For some employees, the annual bonus can make up a vital and substantial part of their yearly pay. According to research from recruitment agency Aaron Wallis, based on Office for National Statistics (ONS) figures, the average bonus for corporate managers and directors is just shy of £8,000 at £7,878.

With almost two million people holding such positions, that’s a significant amount of potentially unrecognised income. Even at the lower end of the scale, the average bonus of a full-time worker is just over £2,000.

The increasing cost of living, coupled with a rising Bank of England base rate over the last few years, makes it more important than ever for lenders to consider all of a borrower’s income when assessing affordability, especially for those with complex incomes.

Data from Moneyfacts reveals a significant increase in the average two-year and five-year fixed-rate mortgage over the past two years. As of mid-May, the average two-year fix stood at 5.91%, nearly doubling from 3.03% in May 2022. This rise could pose substantial affordability challenges for some borrowers, and including all of their income could make all of the difference.

From all walks of life

When we talk about borrowers with complex incomes, they can come from all walks of life, whether they are contractors, benefit recipients, the self-employed, zero-hour contractors, investors, or entrepreneurs with variable incomes.

While the personal circumstances of such borrowers might differ, they share one thing in common: their additional income is often treated as second-class.

Such borrowers can face difficulties when applying for mortgages, as standard automated underwriting processes might not be able to recognise and account for variable forms of income. For these borrowers, a manual approach to underwriting might offer significant benefits, providing a more personalised assessment of what they can afford.

Since the pandemic, the work patterns of many borrowers have changed, a shift further exacerbated by the cost of living crisis. Many borrowers now rely on alternative income streams to supplement their earnings, leading to a more complex financial landscape. To continue encouraging home ownership and reducing reliance on the rental market, it is essential for lenders to recognise these additional sources of income.

We have experienced firsthand how assessing all forms of a borrower’s income can make a difference to their affordability, helping them achieve their homeownership goals, whether remortgaging or buying a home.

An expat is a prime example of a borrower who might have a complex income. Expat borrowers can earn high incomes through self-employed or contract work. On top of this, their income might be in a foreign currency. Such a scenario can prove too complex for some lenders, as these income sources often do not fit neatly into the boxes required by traditional automated mortgage underwriting systems, which typically prefer standard incomes.

A manual underwriting approach can look at a borrower as a person and not just a number. This is an area where building societies like ours, which focus on specialist lending, have thrived by fully assessing the applicant’s past and current employment and thoroughly evaluating their financial position.

This approach not only helps us build more personalised relationships with our broker partners but also benefits borrowers by providing them with fairer access to mortgages.

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