If you're thinking about borrowing money to purchase a home or invest in property, it's important to understand how banks view bonus income. Bonus income is a lump sum payment that you receive for your performance, which may be paid quarterly, semi-annually, or annually. Banks are typically conservative when it comes to lending against bonus income because it's not considered guaranteed income.
Before we dive into how banks calculate bonus income, it's important to understand what it is. From a bank's point of view, bonus income is above and beyond your base income. It's a payment that you may receive as a reward for hitting a sales target, achieving certain performance metrics, or as part of your job contract. Bonus income is not a guaranteed form of income, and that's why banks are typically conservative when lending against it.
There are three basic methods that banks use to calculate bonus income, depending on their appetite for risk.
It's important to understand how banks view bonus income because it can impact your borrowing capacity. For example, if you've received a $30,000 bonus in the last year, and the bank uses the one-year approach, they will assume that you will continue to receive that same bonus every year and allocate 100% of that bonus towards your lending. However, if the bank uses the two-year approach and takes the average, they will assume that your bonus income is $20,000, which will impact your borrowing capacity.
In conclusion, bonus income is a great way to increase your income and borrowing capacity, but it's important to understand how banks view it. Banks are typically conservative when lending against bonus income because it's not a guaranteed form of income. Knowing how banks calculate bonus income can help you determine your borrowing capacity and plan for the future.
If you're thinking about borrowing money, it's always a good idea to speak with a mortgage broker or financial advisor who can help you navigate the lending landscape and find the best option for your specific circumstances.