How Bonuses and Overtime Are Calculated in Mortgage Applications

Applying for a mortgage is a big undertaking that involves taking a close look at your finances. In most cases, that means your income is one of the biggest factors that determine how much you can borrow. If your income includes enhanced pay, such as overtime, bonuses, commission or other variable earnings, this can make things a bit more complicated.

So, how do lenders treat things like bonuses and overtime when assessing affordability? In this article, we’ll learn more about how variable earnings work for mortgage applications and how WIS Mortgages can help you find the right mortgage for your circumstances.

Key Takeaways

• Bonuses and overtime can be used in mortgage applications, but lenders assess them as variable income.
• Guaranteed or regular overtime is often accepted at higher percentages; sometimes up to 100% if it’s consistent and well-evidenced.
• Annual bonuses are usually averaged over 2 to 3 years, with lenders typically including 50% of the average in affordability calculations.
• Each lender uses its own criteria, which means borrowing amounts often vary between lenders.
• Applicants can improve outcomes by using a mortgage adviser to find a flexible lender.

Why Do Bonuses and Overtime Matter to Mortgage Lenders?

Your income is usually one of the most important factors lenders will assess when looking at your mortgage application. Lenders need to know two key things about your income:

• Is the income reliable?
• Is it likely to continue once the mortgage is in place?

Basic salary is straightforward, as it’s stable and predictable. Variable income, however, can be a bit more stop-start. As lenders need to guarantee that borrowers can comfortably afford repayments both now and in the future, they assess bonuses and overtime more carefully.

This does not mean lenders ignore additional income. In fact, many will use a percentage of it in their affordability calculations, sometimes even 100% if the income is regular enough.

It’s important to remember that relying on variable income can present challenges. If your overtime or bonuses are reduced or stop, this may impact your ability to afford mortgage repayments in the future.

What Types of Variable Income are Considered by Mortgage Lenders?

Variable income can be tricky for lenders to assess, as it comes in so many different forms. This form of income can include:

• Guaranteed overtime
• Regular voluntary overtime
• Seasonal overtime
• Annual bonuses
• Quarterly or monthly bonuses
• Commission
• Shift allowances
• On-call or standby payments
• Tips or service charge income (industry-dependent)

Each type of income is assessed differently by lenders. They are typically looking for frequency, reliability and evidenced earnings when assessing variable income.

How Do Lenders Assess Overtime for Mortgage Applications?

Overtime is extremely common in many different sectors such as healthcare, retail, logistics, transport, and manufacturing. However, it’s important to understand that not all overtime is treated equally.

Guaranteed Overtime

If your contract states that overtime is guaranteed (e.g., mandatory weekend hours), lenders often accept 100% of this income.

Regular Overtime

If you consistently work overtime, lenders usually consider between 50% and 75% of your average overtime earnings. Some lenders will stretch to 100% if overtime is long-standing, predictable and clearly evidenced.

Voluntary Overtime

For voluntary overtime, lenders look closely at how long you’ve been doing it and whether it’s consistent or not. They may also check with your employer to see if this level of voluntary overtime is likely to continue.

In many cases, lenders will include 50% to 60% of voluntary overtime in affordability calculations.

Looking to find out how much you can afford for a mortgage? Use our free mortgage affordability calculator to find out in a few clicks.

Case Study: Helping a First-Time Buyer Use Overtime and Bonus Income

We often help first-time buyers across their mortgage journey at WIS Mortgages, but sometimes it’s more complicated than usual. In one case, we helped a young first-time buyer who was looking to secure a mortgage. They worked in a call centre and regularly took on overtime due to staffing shortages. They also received quarterly bonuses based on performance, but had only been at the business for around a year.

So, we identified some of the biggest challenges our client would face when applying for a mortgage. The biggest problem was that most lenders look for at least two years of bonus history, but our client only had one year.

There was also the issue with his variable overtime, as most lenders will cap usable overtime at 50 %. Lastly, there was the affordability limit issue. Under normal lender criteria, our client would only qualify for a one-bedroom property.

How We Helped

Our team decided to find a specialist lender who would accept the one year of bonus evidence as part of their affordability assessment. We also secured a lender who assessed 60 % of overtime income, instead of the standard 50 %.

In this case, this tailored approach helped our client secure a more suitable mortgage. However, results like this depend on individual circumstances and are not guaranteed. This was achieved by fully leveraging their overtime and bonus to maximise affordability.

Ultimately, this proved to be a successful first-time buyer outcome that would not have been possible via standard lenders.

How Are Bonuses Treated in Mortgage Assessments?

Bonuses can be tricky because they often depend on factors like company performance, personal targets, or end-of-year reviews. As they aren’t guaranteed, lenders apply strict rules to bonuses during affordability assessments.

Annual Bonuses

Most lenders will create an average for your annual bonuses by using the last two to three years. They will then use 50 % of that average to assess your affordability. To do this, lenders may ask for evidence such as your P60 or payslips.

A few lenders will use 100% of an annual bonus if it has been paid consistently for three years or more. So, it really helps to shop around or get some help from our team at WIS Mortgages.

Quarterly or Monthly Bonuses

If you receive monthly or quarterly bonuses, then lenders may accept them as regular income provided:

• They appear on every payslip
• The employer states they are expected to continue
• The amounts are consistent and predictable

Discretionary Bonuses

As employers can choose whether to award discretionary bonuses, they are often assessed with a bit of caution. Lenders may choose to include anywhere from 0 to 50 % of the average amount. In most cases, lenders will only use discretionary bonuses if there is a track record of you receiving them over several years.

If you receive a one-off bonus, lenders will generally not accept it as part of your income.

Frequently Asked Questions

Q. Do mortgage lenders count overtime as part of my income?

A. Yes, many lenders count overtime, especially if it’s regular or guaranteed. Depending on the lender, they may use 50% to 100% of your average overtime earnings.

Q. Will lenders accept voluntary overtime?

A. Yes, but you will need to show a consistent pattern over 3 to 12 months. Many lenders will consider a percentage of voluntary overtime when calculating affordability.

Q. How do lenders treat annual bonuses?

Annual bonuses are typically averaged over the past 2 to 3 years. Lenders may include 50% of this average, although some more flexible lenders will use a higher percentage if bonuses are paid consistently.

Q. Is commission counted towards my mortgage affordability?

Yes. Commission-heavy applicants (such as sales roles) can often use a large proportion of their commission income. Many lenders average 3 to 12 months and accept 50 to 75%, with some going higher.

Q. Will a one-off bonus help me borrow more?

A. Generally, no. One-off or irregular bonuses are usually excluded because lenders can’t rely on them as part of your ongoing income.

Find a Lender Who Considers Your Income With WIS Mortgages

Bonuses and overtime are common ways to receive income, but they don’t always help with your mortgage application. Some lenders may consider bonuses and overtime when assessing affordability. However, how this impacts borrowing potential varies and should be assessed with the help of a mortgage adviser. Although every lender has its own criteria, some are willing to accept a substantial portion of variable income when it’s regular, well-documented and likely to continue.

As different lenders assess bonuses and overtime in different ways, working with an experienced mortgage adviser like WIS Mortgages can help enormously. To get started, please reach out to our team today.

Important FCA Warning

This financial promotion has been approved by WIS Contractor Mortgages Ltd (FRN 824411), which is authorised and regulated by the Financial Conduct Authority, in accordance with section 21 of the Financial Services and Markets Act 2000.

Calculations are estimates and do not constitute an offer. Affordability assessments vary by lender.

As a mortgage is secured against your home, it may be repossessed if you do not keep up the mortgage repayments. Written by the mortgage experts at WIS Mortgages, specialists in complex income and affordability assessments.

WIS Mortgages is a trading name of WIS Contractor Mortgages Limited, which is authorised and regulated by the Financial Conduct Authority. FCA number: 824411.

This article is for information purposes and does not constitute personal mortgage advice. You should speak to a qualified mortgage adviser to assess your individual circumstances.