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Thinking Like Bankers: Part 2

Thinking Like Bankers: Part 2

May 28, 2023

Income assessment in a mortgage application is one of the most important factors that determine if your application will get approved and how much will get approved. In this blog we will go over different types of income, what lenders look for, and how you can have the right documentation before your mortgage application. Each lender has their specific requirements however below is a good indication of what most lenders are usually after.

· Pay-as-you-earn tax (P.A.Y.E.) - is the most common type of method everyday customers are paid, which is employees earning a wage or salary are taxed directly from their pay. If you are a P.A.Y.E. customer depending on the lender you would need to show the last 3 months' income which can be either through your bank statement or payslip. (Signed work contract can be used depending on if it is within 6-12months)

- If you are a P.A.Y.E. customer and your income fluctuates depending on the lenders' policy, they will either use the lowest amount received in the past 3 months or they will average your 3 months 'salary. However, if the lender does need to understand why your income fluctuates, they will seek further clarification. This is where Benchmark will work with you and provide the right guidance so we can submit the highest quality application to lenders which maximizes your income levels.

- At Benchmark we discuss every component of the income you receive to paint the right picture for lenders, so they have a good understanding of what your base rate is, shift/meal allowance, or penal rates. Breaking these figures down will enable us to use your maximum income. The following scenario is quite common for individuals in the medical field such as nurses or doctors whom Benchmark has assisted on numerous occasions to get the best results.

 

· Commission – is quite common in New Zealand. There are two types of commission clients, the first type of customers are who earn their income 100% through commission they fall under self-employed/business owners. The second type of commission income are clients who get paid P.A.Y.E. but receive a yearly commission from their employer for various reasons such as meeting their targets. The general rule of thumb across all main bank lenders is you need to be paid commission last two years and they tend to use the lower amount of the two years worth of commission.

. However, in some cases, you may have been paid a commission for 10 years till 2019, and due to COVID it stopped in 2020 but it started again in 2022 but this is not the last two years. This is when Benchmark comes in and understands your financial position, and the industry you work in and mitigates to lenders your scenario.

· Self-Employed Income/Income from your business, we deal with a vast number of clients who own businesses of various scales turnover ranging from $200k to $10mil plus – lenders generally require more documentation from customers if this is their source of income. If you have been in a trading business or self-employed for the past two years lenders will require the last two years company financials and prefer seeing your IR3 tax summary for the past two years.

· Most lenders also will require the last 3 months' management accounts for the business to validate the financials in some cases if the servicing on your application is slim, they may request Year to date financials – we can work with you to let you know what is required which saves you money on accountant fees.

At Benchmark we deal with clients who own businesses or are self-employed regularly and know the ins and outs of what is required with lenders which will make the whole process seamless for our clients. We first take time to understand your business, so we can explain to our lenders your financial position, key things we discuss:

-         Industry you are in and current trends for that industry.

-         Is it a contract-based business or self-sourced?

-         Is the business seasonal?

-         High overview of your profit/loss and balance sheet to understand the financial position of the businesses and if there is anything to address before submission of your application.

The above are some of the key aspects lenders are looking to understand for business clients seeking residential funding and we will work with you throughout the process to make the process seamless.

These are some of the key types of income which are used in everyday mortgage applications. Further, in our thinking like the bankers’ series, we will discuss other incomes such as dividends, benefits, overseas income, and royalties.

DISCLAIMER: The information contained in this blog is general in nature. We cannot assess anything about your personal circumstances, your finances, or your goals and objectives, all of which are unique to you. Before making financial decisions, we highly recommend you seek professional advice from someone who is authorized to provide financial advice.

The following is a general guide on what banks/lenders look for in terms of income verification and each lender's policy can be changed at any given time.

 

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