Remortgage With Bonus Income

How Lenders Assess Bonus Income

Bonus income is treated as supplementary to your basic salary by virtually all UK mortgage lenders. While your base pay forms the foundation of the affordability assessment, bonuses can provide a meaningful uplift to your borrowing capacity if they are presented correctly.

The key factors that lenders consider when assessing bonus income include:

• Regularity - How frequently you receive bonuses. Annual bonuses paid consistently each year are viewed more favourably than one-off or sporadic payments
• Consistency - Whether the bonus amount has been broadly similar year on year, or whether it fluctuates significantly. Stable bonus levels are preferred
• Track record - How many years you have been receiving bonuses. A longer history provides more confidence that the payments will continue
• Proportion of total income - Some lenders cap the bonus element at a percentage of your total income, typically between 25 and 50 per cent

Most lenders will count between 50 and 100 per cent of your average bonus over the last one to three years. The percentage they use depends on their individual policies and how confident they are in the ongoing nature of your bonus payments.

Some lenders take a straightforward approach and simply average your bonus over two or three years, then apply a discount of around 50 per cent to account for the risk that future bonuses may be lower. Others may use a more sophisticated analysis that considers the trend in your bonus payments over time.

A small number of lenders will use your P60 as the primary income evidence, which includes all bonus payments. This can be advantageous because it captures your total actual earnings without the need for separate calculations about the bonus element.

It is important to understand that even within the same lender, the treatment of bonus income can vary depending on your industry, role and the nature of the bonus scheme. Bonuses in heavily regulated industries such as financial services may be treated differently from those in other sectors.

Types of Bonus Income and How They Are Treated

Not all bonuses are created equal in the eyes of mortgage lenders. The type of bonus you receive affects how it is categorised and assessed during the remortgage application process.

Annual performance bonuses are the most common type and are generally well accepted by lenders. These are typically paid once a year based on individual, team or company performance. Lenders will want to see evidence of bonuses received over two to three years and will usually average the amounts to arrive at a sustainable figure.

Quarterly or monthly bonuses tied to specific targets or metrics can actually be viewed more favourably than annual bonuses because they provide more frequent data points. If you receive regular quarterly bonuses, twelve months of payslips will show four separate bonus payments, giving the lender a clear picture of your typical bonus earnings.

Guaranteed bonuses, sometimes offered as part of a recruitment package for the first year or two of employment, are treated very favourably. Because they are contractually guaranteed, some lenders will count them at 100 per cent without any discount. However, lenders will also want to know what will replace the guaranteed bonus when it expires.

Discretionary bonuses are at the employer's discretion and are not guaranteed. These are treated more cautiously by lenders, who recognise that they may not be paid in future years. A consistent history of receiving discretionary bonuses helps, but lenders may still apply a steeper discount.

Profit-sharing and equity bonuses can be more complex for lenders to assess. Profit-sharing payments depend on company performance, while equity-based bonuses such as share options or restricted stock units involve valuation complexities. Not all lenders will consider these types of bonus, so specialist advice is recommended.

Sign-on or retention bonuses that are one-off payments are generally not counted by lenders because they are not recurring. While they may boost your income in the year they are paid, lenders recognise that they will not continue and therefore do not include them in the ongoing affordability assessment.

Evidence Required for Bonus Income

Providing comprehensive evidence of your bonus income is critical to ensuring it is properly considered in your remortgage application. The more thorough your documentation, the more likely the lender is to accept your bonus at a favourable level.

The standard documents you should prepare include:

• Payslips showing bonus payments - These should clearly show the bonus as a separate line item. If your bonus is paid annually, you will need the payslip from the month it was paid for each of the last two to three years
• P60 annual tax summaries - These show your total earnings for each tax year and are useful for confirming the overall contribution of bonuses to your annual income. Provide P60s for the last two to three years
• Employment contract - This should detail your bonus scheme, including the target bonus level, frequency of payment and any conditions that must be met for the bonus to be paid
• Bonus award letters - If your employer provides formal notification of bonus awards, these can serve as additional evidence of amounts and regularity
• Employer confirmation letter - A letter confirming your participation in the bonus scheme, recent bonus history and the expected continuation of the scheme

If your bonus has varied significantly from year to year, it is helpful to provide context for the variation. For example, if one year was unusually low due to a company restructure or an exceptional circumstance, an explanation can help the lender take a more balanced view rather than using the lowest figure.

For equity-based bonuses such as share options or restricted stock units, you may need to provide additional documentation including share vesting schedules, exercise statements and current share valuations. Not all lenders will consider these, so check in advance whether your chosen lender accepts equity-based compensation.

Some lenders may also want to see your bank statements showing the bonus payments being credited to your account. This serves as independent verification that matches the figures shown on your payslips and provides an additional layer of evidence.

Maximising the Value of Your Bonus for Remortgaging

If bonus income is a significant component of your overall earnings, there are practical steps you can take to ensure it is given full weight in your remortgage application.

Apply at the right time. If your annual bonus is paid at a specific time of year, consider timing your remortgage application shortly after it has been paid. This ensures the most recent bonus appears on your latest payslip and P60, giving the lender the most up-to-date picture of your earnings.

Build a multi-year track record. The longer your history of receiving consistent bonuses, the more comfortable lenders will be including them. If you are relatively new to a bonus-paying role, it may be worth waiting until you have received at least two annual bonuses before applying, as many lenders require a two-year history.

Keep bonus documentation carefully. Retain copies of all bonus-related payslips, award letters and P60s. If you need to demonstrate a three-year history, having these documents readily available speeds up the application process and avoids delays.

Choose a lender that values bonuses highly. Some lenders are significantly more generous than others in how they treat bonus income. A whole-of-market broker can identify which lenders will give you the best outcome based on your specific bonus structure and payment history.

Present your bonus scheme clearly. If your employer has a structured bonus scheme with clear targets and payment criteria, explaining this to the lender through your contract or an employer letter can add credibility. A transparent and well-defined scheme is viewed more favourably than vague or informal bonus arrangements.

Consider using your bonus for the deposit. If your bonus is substantial, using it to increase your deposit or reduce your outstanding mortgage balance before remortgaging can lower your loan-to-value ratio. This can give you access to better interest rates, which may be more valuable than having the bonus counted as income.

Be consistent in your bonus declarations. Make sure the bonus figures you declare on your application match what is shown on your payslips, P60s and bank statements. Discrepancies between documents will delay your application and could raise concerns with the underwriter.

Bonus Income in Specific Industries

The treatment of bonus income can vary depending on the industry you work in. Some sectors have well-established bonus cultures that lenders are familiar with, while others may require more explanation and evidence.

Financial services. Bonuses in banking, insurance and financial services are commonly high relative to basic salary and are well understood by lenders. However, post-financial-crisis regulations have made some bonuses in this sector subject to clawback provisions and deferral, which some lenders take into account. Most will still count a substantial portion of financial services bonuses.

Sales and marketing. Performance-related bonuses in sales roles are common and generally well accepted, provided there is a consistent track record. Lenders understand that sales bonuses can vary with market conditions but will typically average them over two to three years. If your bonus scheme has clear, achievable targets, this works in your favour.

Technology and engineering. Equity-based compensation, including share options and restricted stock units, is common in the tech sector. Not all lenders will consider equity-based bonuses, and those that do may require them to be vested and exercised before they count. Cash bonuses in tech are treated in the standard way.

Public sector and NHS. Bonuses in the public sector are less common, but performance-related pay, Clinical Excellence Awards for senior doctors and other structured bonus schemes do exist. These are generally well documented and consistent, making them straightforward for lenders to assess.

Legal profession. Profit share and performance bonuses for solicitors and barristers can be significant. Lenders familiar with the legal profession will understand these structures, but those less experienced in this area may need more explanation. Specialist brokers with experience in professional services can be particularly helpful.

Regardless of your industry, the fundamental principles remain the same. Lenders want to see consistency, predictability and adequate documentation. A broker who understands your industry and its bonus structures can present your application to the most appropriate lender and explain any sector-specific nuances that might otherwise cause confusion.

Common Questions About Bonus Income and Remortgaging

Many borrowers have similar concerns when it comes to including bonus income in their remortgage applications. Understanding the common issues can help you prepare more effectively.

What if my bonus was lower this year? A single lower bonus does not necessarily derail your application. Lenders will typically look at the average over two or three years, so one lower year may be offset by stronger years. If there is a specific reason for the reduction, such as a company-wide issue that has since been resolved, explaining this to the lender can help.

Can I still remortgage if I have not received my bonus yet? If you are expecting a bonus but have not yet received it, lenders cannot count income you have not earned. However, if you have a documented track record of receiving bonuses in previous years, lenders will typically average the historical payments. You do not need to wait for this year's bonus to apply.

What if my employer does not provide a confirmation letter? While an employer letter is helpful, it is not always essential. Your payslips, P60s and employment contract should provide sufficient evidence of your bonus history and the structure of your bonus scheme. Some lenders will accept these documents without a separate employer letter.

Do deferred bonuses count? Deferred bonuses, where payment is spread over several years, may be partially counted by some lenders. However, the treatment varies considerably, and not all lenders accept deferred compensation. If a significant portion of your bonus is deferred, specialist advice is important.

Can I use my bonus to make overpayments? Absolutely. Many borrowers choose to use their annual bonus to make lump sum overpayments on their mortgage, reducing the balance and potentially shortening the term. Most mortgage products allow overpayments of up to 10 per cent of the outstanding balance per year without penalty.

What about tax on bonuses? Lenders assess income on a gross basis before tax, so the amount of tax paid on your bonus does not affect the affordability calculation. However, higher rate tax on bonuses means your net take-home is less, which is worth bearing in mind when considering what you can actually afford to pay each month.