We talk to Zoe Ross, Private Banker at Investec Private Bank about how you can leverage your bonus income to improve your mortgage prospects.
While annual bonuses have long been a part of City culture, asset managers are increasingly looking to the big banks and adopting deferred bonus schemes.
Simply put, this means that part of an employee’s bonus is held back and instead awarded in cash, shares or fund instruments (typically units in funds managed by the employee) over a period of time – usually three years, or for as long as they remain in the job.
But with the financial services sector operating against a backdrop of increasingly stringent regulation, deferred bonus schemes are also coming under scrutiny. Paul Wolstenholme, a partner in PwC’s People and Organisation (P&O) practice cites CRD IV, AIFMD and UCITS V, which include specific rules on how variable remuneration should be structured and paid.
However, current practice among asset management firms is mixed. Some operate deferral schemes either as a result of regulation or for their own commercial reasons, while others opt not to operate any at all.
Wolstenholme highlights four key reasons why firms might defer bonuses:
- Acts as a financial incentive for employees to stay with their firm.
- Rewards good risk management and sustainability – balancing short-term performance with the business’ long term success.
- Facilitates a high level of share ownership if companies deliver part of the deferred bonus in equity.
- Conserves cash for the business.
“There is a possibility that deferral schemes are here to stay, and will be expanded so all firms and employees will need to take them into consideration,” Wolstenholme says. “I think this could happen in the next few years given the political backdrop around executive pay. It’s also simpler to make regulations that say everyone should defer.”
Can deferred bonuses hurt mortgage prospects?
And what about employees whose bonus earnings are deferred? As well as making it harder to move jobs, these arrangements can significantly impact spending power, especially for those new to a firm or fairly early on in their career. Making a large purchase such as property can become troublesome when the bonus isn’t available in ready cash.
This can pose a challenge for High Street lenders, who normally only take into consideration what a mortgage applicant has physically earned and banked.
At Investec, we regularly see clients who need us to consider more than basic salary. We take a different approach and build flexible solutions tailored to our clients’ financial objectives. To help our clients leverage their deferred cash bonuses, we take the time to understand their often-complex income patterns, including bonuses paid in sterling and foreign currencies, or even vesting stock.
We consider earnings over the previous three years, including up to 100% of the average of the bonuses (including those not earned or paid in sterling) awarded over this period. Some lenders won’t consider the whole amount and apply a ‘haircut’ of as much as 50% to a bonus or, for example, cap it at 100% of salary.
Find a solution to fit your income pattern
When tailoring the right mortgage solution for our clients, we can consider the whole picture: our credit assessment looks beyond income and expenditure to take into consideration our clients’ future cash flows and asset base. Part of our due diligence includes getting to know the organisations our clients work for, the asset classes they are involved with and track records of the funds that they run.
We also have the necessary experience to consider cases other lenders won’t, such as executives who are paid in foreign currencies. Our foreign-currency mortgages allow us to offer sterling mortgages where the repayment strategy is not denominated in sterling.
As well as looking at a client’s financial history, we look at their future cash flows to assess affordability, helping them to leverage their future earnings power today.
Investec’s mortgage-lending strategy in a nutshell:
Designed for investment professionals earning over £300,000 per year.
Holistic assessment of financial situation.
100% of bonus considered, whether cash, shares or fund instruments.
Flexible repayment structures.
High LTV – up to 85% on high-value properties.
Foreign-currency mortgages considered.
This article is for general information purposes only and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions, nor for any loss or damage arising from reliance upon any information herein. It is advisable to contact a professional advisor if you need further advice or assistance. Your property may be repossessed if you do not keep up repayments on your mortgage.