The Financial Conduct Authority (FCA) recently published an interim report that gave an overview of how well the mortgage industry is working for the benefit of consumers.
This Mortgages Market Study highlighted two notable findings.
Firstly, the report found that consumers could save an average of £550 a year by using an intermediary, rather than going to a lender directly. Secondly, it stated that intermediaries with access to a greater number of lenders offered cheaper products on average than intermediaries with access to fewer lenders.
Both of these points strongly back up the value of using a broker, as explained briefly in last month’s article.
As we begin to take an in-depth look at some key areas in the market that highlight the value of an adviser, we’ll also include case studies to illustrate the various benefits. This month we take a look at ‘complex income structures’.
What is a complex income structure?
The word ‘complex’ in this context is actually quite misleading. The following are all examples of income structures that could be classed as ‘complex’ by mortgage lenders:
- Clients who earn bonus, overtime or commission income
- Clients paid based on the hours or days worked, so their income fluctuates
- Medical professionals receiving banding and locum income
- Clients who have become contractors through choice, often setting up their own limited companies
- Employed professionals who have become equity partners at their firms, causing a change in income structure
However, lenders will all view this income in a different way. As a result, the borrowing amounts can be vastly different depending on which lender you speak to.
As such, almost every client now comes under the bracket of a ‘complex income structure’ for the purposes of mortgage lending!
The value of an adviser
As we stated in last month’s article, it is crucial to speak to an adviser with access to as many lenders as possible. This means they can navigate all the options for you and ensure you find the best product to match your needs.
In this context it will not always be the cheapest rate of all products available. Instead, it is about sourcing the cheapest rate from the provider who can lend the required amount. This is based on your income scenario, ensuring you get the purchase price (or loan amount on a remortgage) that you need.
A good adviser will have experience of other clients with similar income structures to you. As a result, they will be able to communicate this to the underwriters at the lender to get scenarios agreed that would not be accepted if you approached the lender directly.
Case Studies
Let’s take a look at two recent case studies of clients here at Alexander Hall that illustrate the above perfectly (names changed in each case study).
Case Study One
The clients:
A young professional couple, who to protect their privacy we will call James and Karen here, were both first-time buyers and had found their dream property. James was a solicitor and Karen a marketing assistant.
The scenario:
James and Karen had met two high street banks, both of which they had current accounts with. Despite their strong professions and having saved up a 15% deposit, they were offered a lower loan amount than they had hoped for by the banks.
Despite having a three-year track record both banks would only use 50% of the clients’ annual bonus income when assessing the maximum borrowing. So, despite the monthly payments being very comfortable the clients had been advised that their dream property was out of their reach. They were given a budget that meant either looking in a different location or at a smaller property.
The solution:
We spoke to a lender who agreed to take 100% of a two-year average of James and Karen’s bonus incomes into account when calculating their maximum borrowing. This meant that the property they had fallen in love with was now within their borrowing means.
The rate offered by this lender was also lower than those being offered by the two initial banks the clients had spoken to. This meant that their monthly payments are also now lower.
A mortgage offer was secured in two weeks and the clients are now looking to move into the property by the end of the month.
- Property value: £530,000
- Loan amount: £450,000
- LTV: 85%
- Rate: 1.78% 2 year fixed
- APRC: 3.7%
- Term: 30 years capital and interest
- Lender arrangement fee: £999 added to loan amount
- Mortgage payment: £1,615pcm
Case Study Two
The clients:
Jill and Chris, as we will call them, were a husband and wife looking to remortgage as they had planning permission to build an extension to their current property, adding an extra bedroom. She is a doctor and he is a manager at a large retail store.
The scenario:
Jill and Chris had never had any issues with previous mortgage applications, as the loan amount was relatively low based on their salaries. However, when looking into the remortgage and the new higher loan amount the clients struggled to find a lender who could take Jill’s locum work into account.
This was despite Jill having done locum work on top of her employed role for several years. Chris’s income also varied depending on the hours he worked each month, and this was also being highlighted as a problem by lenders.
The solution:
Using our direct access to underwriters, we were able to explain the clients’ circumstances and income structures.
Using Jill’s P60 for her locum work income and taking an average of the last three months of payslips for Chris, they were comfortable to use both clients’ incomes. The remortgage has now completed and Chris and Jill have started their home improvement work.
- Property value: £400,000
- Loan amount: £300,000
- LTV: 75%
- Rate: 1.59% 2 year fixed
- APRC: 3.7%
- Term: 25 years capital and interest
- Lender arrangement fee: £999 added to loan amount
- Mortgage payment: £1,215pcm
This article was originally posted in What Mortgage online. You can see the original article here. Please note this will launch a new web page.
