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Rises in variable income limits ‘welcome’ but lenders unlikely to change ‒ analysis

  • 16/02/2023
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Rises in variable income limits ‘welcome’ but lenders unlikely to change ‒ analysis
Brokers have said that mortgage lenders who will accept higher amounts of variable income will become more attractive, but have said it is unlikely more lenders will change their criteria.

Earlier this week Virgin Money and Clydesdale Bank increased their variable income limit from 60 per cent to 75 per cent.

Chris Sykes, technical director at Private Finance, said that it was a “good change” and “helpful for many with variable income”.

He continued: “We haven’t seen any other lenders follow suit really, except from last year with several unwinding changes that were more restrictive and made during Covid.

“It is tricky to see the argument for more mainstream lenders taking higher proportions if we are in more volatile times than pre-Covid. Don’t get me wrong, I’d love more options for my clients but taking a percentage rather than the full amount is to reduce risk based on this income being variable.”


Borrowers held back by ‘ultra-conservative thinking’

Jonathan Burridge, founding adviser at We Are Money, said that customers whose income is based upon commission or bonuses have “struggled to have their full earnings accepted for years”.

He continued that some lenders, like Natwest, would accept up to 100 per cent of average regular income and it was “good to see other lenders starting to treat this income more appropriately”.

Burridge said that there was still a “long way to go and such borrowers are still being held back, like many self-employed individuals, by out-dated and ultra-conservative thinking”.

Scott Taylor-Barr said that lenders’ approach to variable income, such as self-employed income, varied “massively”, with the average coming to around 50 per cent.

“Anyone accepting more than that is going to stand out to brokers; especially given the rise in remuneration packages that now feature elements of variable pay or performance-related pay, be that overtime, commission, or bonus.

“If your pay features variable income then making sure you are talking to the right lender will make a world of difference to the level of mortgage you can achieve, so speaking to a mortgage broker is key,” he added.


‘Is extra income sustainable?’

Justin Moy, managing director at EHF Mortgages, said that variable income was a “feature for most sales personnel or those with plenty of overtime”.

“Assuming this is consistent, then it’s great that more lenders will look more favourably at this important stream of income. Most lenders will take around 50 to 65 per cent of any variable income, and one or two specialist lenders will take 100 per cent, if there is a track record,” he noted.

Moy added: “What borrowers (and lenders) will need to consider is whether that extra income is sustainable, and not just used to stage higher income for a mortgage application. 60-hour weeks can be sustained for a short period but not throughout the year, and using that income can be difficult.

“Anyone with different streams of income definitely needs to speak to an experienced mortgage broker who can assess which lenders to use.”


Variable income changes could reduce specialist lending prices

Austyn Johnson, founder at Mortgages for Actors, said that around 90 per cent of cases coming to the firm had variable income, so changes to increase variable income considered was welcome.

“Any help from lenders towards this policy will always help and mean that the more understanding specialist lenders will need to lower their rates when high street lenders start to sharpen their teeth in this area.

“Lenders will typically allow a little variable, but not a lot and some do not even seem to understand self-employment. It would be ideal if employed and self-employed people could be treated the same with any LTV,” he continued.


Customers need to think about ‘finer details’

Sykes said that clients should “explore measures to make sure they can afford a mortgage both annually on paper and monthly in reality”.

As an example, he said that for clients with big bonuses they recommend taking a longer term or put a significant amount on interest-only to lower payments with a “view they use their variable income to reduce the loan annually”.

He added that they should approach a broker or several lenders to see what options are “really achievable for them”.

Samuel Ewen, managing director at Rosehill Financial Services, said that it was key to consider “finer details”, such as track record over a specified period.

He continued that some lenders might cap variable income at the most recent P60 figure, year-to-date figure or level of basic guaranteed income, so it was important to look at the criteria of different lenders.

Ewen added: “We find that many clients are surprised by the limitations this can present, particularly in roles where variable pay equates to a large portion of their earnings. When advising clients, it’s also crucial to discuss the importance of having an emergency fund to cover the mortgage payments and other committed costs if earnings are lower in certain months.”

Johnson added that he would recommend keeping a business bank account for the business if you are self-employed to make it simpler to see income and outgoings.


‘Hope for the best, prepare for the worst’

Greig Cowley, mortgage broker at Riverside Mortgages, variable income was “all good and well until it suddenly stops due to illness, an economic downturn or a change to how businesses remunerate their staff”.

“Even though lenders may accept specific amounts of overtime, bonus or commission, we have a duty of care to ensure that borrowers aren’t overstretching themselves. While affordability decisions sit squarely with the lender, it’s crucial that borrowers really understand the consequences of their actions and choices,” he explained.

Cowley said that a client with significant variable income could consider stretching the loan term and making overpayments to “build a buffer into their mortgage should their income come to an abrupt end”.

“Our mantra has always been hope for the best, prepare for the worst,” he added.

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