What is a complex income mortgage?
A “complex income mortgage” is not usually a separate mortgage product. It is a way of describing cases where the borrower’s income needs more detailed assessment.
Examples may include:
- self-employed sole traders;
- limited company directors;
- contractors and freelancers;
- applicants with multiple jobs;
- income from bonuses, overtime or commission;
- applicants with rental or investment income;
- professionals with partnership income;
- business owners who retain profits in the company;
- borrowers with income that has changed recently.
Some lenders are more comfortable with these cases than others, and criteria can vary significantly.
How lenders assess self-employed income
For sole traders, lenders often look at income declared through self-assessment, supported by documents such as SA302 tax calculations and tax year overviews. For limited company directors, lenders may consider salary and dividends. Some lenders may also consider retained profit, depending on their criteria.
Consumer guidance from Which? notes that lenders commonly ask for at least two years of accounts for self-employed applicants, although criteria vary. The more consistent your records are, the easier the case may be to evidence.
Lenders may ask for:
- SA302s and tax year overviews;
- finalised accounts;
- accountant’s certificates;
- business bank statements;
- personal bank statements;
- contracts or evidence of future work;
- an explanation of any large changes in income.
Why affordability is more than an income multiple
You may see references to lenders considering higher income multiples, but mortgage affordability is more detailed than a single multiplier.
Lenders assess whether the mortgage is affordable based on income, committed expenditure, credit commitments, household costs, dependants and the mortgage term. FCA responsible lending rules require lenders to consider whether customers can afford the mortgage, not simply whether the headline income looks high enough.
That means two applicants with the same income could receive different borrowing results depending on:
- existing loans or credit cards;
- childcare costs;
- lease payments;
- pension contributions;
- credit history;
- deposit size;
- property type;
- mortgage term;
- whether income is stable or variable.
Common reasons complex income cases can be more difficult
Complex income applications can run into issues if the case is not packaged clearly. Common challenges include:
- accounts showing a recent income dip;
- profits retained in the business rather than drawn personally;
- dividends reduced for tax planning reasons;
- short trading history;
- fluctuating contract income;
- large business expenses;
- personal and business spending mixed together;
- unexplained bank transactions;
- approaching a lender before checking criteria.
Sometimes the issue is not affordability itself. It may be that the chosen lender does not accept the particular income type in the way the applicant expects.
How to prepare before applying
If your income is not straightforward, preparation can make a significant difference.
Before applying, it may help to gather:
- your latest two years of accounts, if available;
- SA302s and tax year overviews;
- recent business and personal bank statements;
- details of contracts, invoices or future work;
- proof of deposit;
- details of credit commitments;
- an explanation for any income changes.
It can also help to speak with your accountant before applying. For company directors, the way income is drawn from the business can affect how lenders view affordability.
Houz does not provide tax advice. If you need advice on tax planning, retained profits or how to draw income from a company, you should speak to a qualified tax adviser or accountant.
Why using a broker can help
A broker can help identify lenders whose criteria may be more suitable for your income structure. For example, one lender may ignore retained profits while another may consider them. One lender may average two years’ income, while another may use the latest year where income is increasing, subject to their criteria.
For complex cases, the lowest advertised rate is only useful if the lender is prepared to accept the income and circumstances.
Final thoughts
If you are self-employed, a contractor, company director or have multiple income streams, do not assume a high-street calculator gives the final answer. Complex income usually needs a more detailed review.
Houz can help review your circumstances, explain which income evidence may be needed and discuss mortgage options that may be suitable for your situation.
Important information: There may be a fee for mortgage advice. The precise amount of the fee will depend upon your circumstances but will range from £49 to £349 and this will be discussed and agreed with you at the earliest opportunity. Tax treatment depends on the individual circumstances of each client, and may be subject to change in the future. The guidance and/or information contained within this article is subject to the UK regulatory regime and is therefore targeted at consumers based in the UK.
Sources used: FCA responsible lending guidance; Which? guidance on self-employed mortgage applications; GOV.UK/HMRC documentation concepts such as SA302 and tax year overviews.
This guide is general information, not personal advice. Start a fact find to discuss your situation.