Do Lenders Accept Bonuses? | How Bonus Income Can Increase Your Borrowing Capacity

Borrowing with Bonus Income: What You Need to Know

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.

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Understanding Bonus 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.

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Calculating Bonus Income

There are three basic methods that banks use to calculate bonus income, depending on their appetite for risk.

1. One-year approach: This is the most aggressive policy that banks use. If you've received a bonus in the last 12 months, the bank will assume that you will continue to receive that same bonus every year and allocate 100% of that bonus towards your lending. This approach is best suited for individuals who work in industries where bonuses are a regular part of day-to-day life.
2. Two-year approach: This is a more conservative approach where banks want to see a little bit of consistency from your end. They will look at the bonuses you've received over the past two years and either take the average or the lowest figure. The bank will assume that you will continue to receive that same bonus for the next 30 years.
3. Lowest approach: This is the most conservative approach where the bank assumes that you will receive the lowest bonus payment you've ever received, every year, for the next 30 years.

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Why is Understanding Bonus Income Important?

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.

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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.

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