In the UK, when a lender assesses affordability for a mortgage or other loan, they typically consider various sources of income to determine the borrower’s ability to repay the loan. The income sources generally included in a lender’s affordability assessment can vary slightly depending on the lender and the type of loan, but they commonly include the following:
- Employment Income:
- Basic Salary: The regular income received from employment before tax and other deductions.
- Overtime and Bonuses: Additional income earned through overtime work or performance-based bonuses.
- Commission: Income earned based on sales or other performance-related metrics.
- Guaranteed Allowances: Regular payments provided on top of basic salary, such as housing allowances or car allowances.
- Self-Employment Income:
- Net Profit: Income after deducting business expenses and taxes from gross income.
- Drawings or Dividends: Payments taken from a business’s profits for personal use, in the case of partnerships or limited companies.
- Pension Income:
- State Pension: Regular payments received from the government upon reaching State Pension age.
- Private Pension: Income received from personal or workplace pension schemes.
- Investment Income:
- Interest and Dividends: Income received from savings accounts, investments, stocks, and shares.
- Rental Income: Income received from renting out properties or other assets.
- Benefits and Allowances:
- Universal Credit: Payments combining several benefits for people on low incomes or out of work.
- Child Benefit: Tax-free payment for people responsible for children.
- Disability Allowance: Payments for people with disabilities that may affect their ability to work.
- Other Sources of Income:
- Alimony or Maintenance Payments: Regular payments received from a former spouse or partner.
- Regular Gifts or Support: Regular financial support from family members or others.
What Lenders Consider in Affordability Assessment:
- Stability and Consistency: Lenders typically look for stable and consistent income sources that are likely to continue for the foreseeable future.
- Net Income: Lenders often consider the net income (after tax and deductions) rather than gross income for affordability calculations.
- Verifiability: Income sources must be verifiable through documentation such as payslips, tax returns, bank statements, or letters from employers or benefit providers.
- Debt and Commitments: Lenders also assess the borrower’s existing debts, financial commitments, and living expenses to ensure the mortgage repayments are affordable alongside other financial obligations.
Conclusion:
When applying for a mortgage or loan in the UK, borrowers should prepare to provide detailed information about their income from various sources. Lenders conduct thorough affordability assessments to ensure that borrowers can comfortably manage their loan repayments based on their income and financial circumstances. It’s advisable for borrowers to maintain clear records of their income sources and seek professional advice if needed to understand the lender’s requirements and optimize their application.