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25 Jan 2020

'Bonus-friendly' mortgages: which banks will let you borrow the most?

Report says annual bonuses can add up to £33,000 to your borrowing power

Workers who receive an annual bonus could boost their borrowing power by up to £33,000, simply by choosing the right mortgage lender.

That's according to new research by the mortgage broker Private Finance, which says some lenders factor annual bonuses into their affordability calculations more readily than others.

Here, we explain which banks will consider guaranteed and performance-related annual bonuses, and offer advice on the criteria you'll need to meet.

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Could a bonus boost your borrowing power?

A new report by Private Finance claims workers receive an average annual bonus of £1,329 a year, a figure which rises to £8,391 for those working in the City of London.

It claims that the biggest bonuses go to marketing and sales directors (£14,448 a year) and financial managers and directors (£9,166).

The broker says workers in industries where bonuses are commonplace could boost their borrowing power by up to £33,000 by choosing a mortgage lender that will consider these additional earnings as income.

Do all lenders consider annual bonuses?

Each lender has its own policy on whether bonuses can be used as income, but generally speaking, guaranteed annual bonuses are a much safer bet than performance-related bonuses.

Lenders will generally allow a specific percentage of the bonus when assessing your affordability. This can range from 50% right up to 100%.

Whether you can include an annual bonus as income often depends on how many consecutive years you've received the bonus.

Some lenders require two or three years' worth of evidence of the bonus (in the form of payslips or P60s), while others will base their calculations on the average or lowest bonus you were awarded during that period.

A handful of banks require a letter of evidence from your employer to prove the bonuses have been paid.

Which lenders will accept bonuses?

Guaranteed annual bonuses

We've crunched the numbers, and found that 38 out of 60 mortgage lenders will allow 100% of a guaranteed annual bonus as income.

A further 14 said they'd allow a maximum of 50% of the bonus amount.

The table below shows the policies adopted by the major lenders.

A note of caution - while our table offers a guide, bear in mind that each lender has its own rules on how many years you'll need to have received the bonus, and any evidence you'll need to provide.

Performance-related annual bonuses

Lenders are more reticent to consider performance-related bonuses, as they're not as secure as a guaranteed annual payment.

32 lenders say they'll only allow up to 50% of a performance-related annual bonus, and just 17 will allow the full 100%.

How to ensure your bonus is considered

If bonuses are a significant part of your income, it's worth taking independent advice from a whole-of-market mortgage broker.

A good broker will be able to assess which lenders will take your bonus into account and will be able to navigate the various rules adopted by different banks.

This can also be a useful move if you have a job that relies heavily on commission.

Should you use your bonus to overpay your mortgage?

In this article, we've focused on annual bonuses. If you receive irregular bonuses (say monthly or quarterly performance-related payments), it might be worth considering mortgages that will allow you to overpay on an ad-hoc basis.

Many mortgages will let you overpay up to 10% of the balance each year, but a broker may be able to find a deal that specifically suits your personal circumstances.

How much difference does a bonus make?

Generally speaking, lenders will allow you to borrow up to four and a half times your annual income when applying for a mortgage.

So if you earn £40,000 a year, you could theoretically borrow £180,000, provided you meet the lender's other criteria.

If you then received a £5,000 bonus and chose a lender who will consider this as income, you could theoretically increase your borrowing to £202,500.

Alternatives for first-time buyers

Of course, not everyone receives annual bonuses, and many cash-strappedfirst-time buyers remain locked out of home ownership.

With this in mind, some banks have moved to offer deals that allow buyers to borrow five or five and a half times their income, depending on income or profession.

For example, Barclays announced new criteria in June 2019 meaning first-time buyers earning at least £30,000 could borrow five times their annual income.

Lenders have also looked to innovate by increasing the length of their mortgage terms to 35 years and beyond, allowing buyers to meet affordability criteria by stretching their payments out for longer.

Borrowing calculator

You can use our calculator below for an idea of how much you might be able to borrow.