Find out how your lender will assess your bonus income when determining your serviceability potential during your home loan application.
To assess your repayment capabilities, lenders will ask you to provide a wide range of information during the home loan application process, including details about your employment, income, assets, and liabilities.
Providing details of your income is easy if you’re an employee on a fixed salary who can supply pay slips and bank statements. But what if you receive money on top of your fixed income such as bonuses, commissions, allowances or overtime?
Let’s take a look at how lenders assess each type of bonus income and how you can use this income source to boost your borrowing power.
Sources of bonus income and how they are assessed by lenders
Depending on your occupation, you may rely upon several sources of bonus income. However, as bonus income may fluctuate from month to month, some lenders may not include this when they determine your capacity to repay a loan.
Many lenders prefer you to have a reliable and predictable source of income, so your bonus income may be disregarded when a lender reviews your loan serviceability potential.
In some professions, the bonuses you are paid can work out to be significantly more than your base salary. Some bonuses are based on performance, while others are offered to employees so they can share in a company’s success.
However, the key factor for lenders when assessing your bonus income is how often the bonuses are paid. For example, if you can prove a two-year history of bonuses that are paid regularly (monthly or quarterly), as well as include a letter from your employer stating that the bonuses are regular and ongoing, some lenders will accept all of this bonus income.
Similarly, annual bonuses can be included in your overall income.
However, if you receive bonuses irregularly or on the basis of performance, things can get a little more tricky. While you may be able to include your performance-based bonuses if you’ve regularly received them in the past, one-off bonuses cannot be included. If you receive bonuses irregularly, some flexible lenders will be willing to assess them on a case-by-case basis.
If you work in sales, chances are that some of your income will be based on commissions. But because the amount of commission you receive is going to fluctuate, some lenders tend to be cautious when assessing your income.
As a general rule, your borrowing power may be influenced by how often your commissions are paid. If they’re paid monthly and you are able to demonstrate a consistent commission income over an extended period of time, this will satisfy most lenders.
However if commissions are paid half-yearly or even annually, the lender may not accept your commission income as part of your total income.
Providing several years’ worth of group certificates and tax returns can help strengthen your case.
Another factor to consider is how a lender will assess any allowances you receive as part of your job, such as a car allowance. Unfortunately, many lenders will not recognise an allowance as part of your income, which could restrict the amount you are allowed to borrow.
Rather than classifying your car allowance as part of your income, some lenders take the view that you will use the allowance simply to maintain the company car and that it will not be available to help you make home loan repayments.
However, some Australian lenders are willing to take car and travel allowances into account when assessing your home loan application. Chat to a mortgage broker to find out which lenders may be willing to help.
For many shift workers, the additional money they earn working overtime hours can significantly boost their income. In some cases, it can even make up half their pay. However, how a lender will view your overtime income will vary depending on your situation.
If you provide an essential service, such as if you’re a nurse, a police officer or a paramedic, the lender will often consider 100% of your overtime income when assessing your application. Similarly, if you have a contractual agreement with your employer that you will receive a certain amount of overtime each month, most lenders will take all of your overtime income into account.
In other cases the bank may only accept 50% of your overtime income. It will help if you can provide proof that you have been working overtime for one year or more.
If you own an investment property that provides you with rental income, lenders will take current and future rental income into account when determining your borrowing power. However, investment properties also attract a range of ongoing expenses, and there’s always the chance that rent will drop or the property may be untenanted for a period of time, so most lenders will only take 70% or 80% of your rental income into account.
Bonus income home loan application tips
- Evidence is crucial. Regardless of what type of bonus income you earn, the more evidence you can provide, the greater your borrowing power will be. Bank statements, tax returns, group certificates, letters from your employer and more can all support your case.
- Regular is better. As a general rule, bonus income you receive regularly and consistently will be viewed much more favourably than extra money you receive haphazardly. This is because lenders like to know that you will be able to rely on this predictable source of income to help you make your mortgage repayments.
- Choose your lender carefully. Some lenders have more flexible lending criteria than others when it comes to accepting sources of bonus income, so you may have substantially greater borrowing power with one lender compared to another. A mortgage broker will help you find the right lender for your needs.
- Ask a mortgage broker. Mortgage brokers specialise in offering tailored home loan advice to suit your financial situation. They have an in-depth understanding of the criteria used by different lenders when assessing home loan applications, and they can help you get a loan that meets all your requirements.