How Bonus Income, Overtime & Commissions Really Affect Your Borrowing Power

If your pay includes more than just a standard salary: bonuses, commissions, overtime, or allowances for higher duties:

You might be wondering how these variable forms of income impact your ability to borrow.

Spoiler alert! It’s not as simple as it seems and how lenders treat this variable income could be the key to unlocking or limiting your borrowing potential.

In today’s blog we cover:

How Lenders Handle Variable Income: Why It’s Not as Simple as It Seems
The ‘Shading’ Effect: Why You Won’t Get 100% of Your Bonus or Commission
Overtime Income: Who Gets Full Credit and Who Gets Less?
Higher Duties Allowances: When They Count and When They Don’t
Bottom Line: Maximizing Your Borrowing Power with Your Strategic Mortgage Broker

How Lenders Handle Variable Income: Why It’s Not as Simple as It Seems

While your base salary is usually counted at 100% of its value, variable income is treated with caution.

That’s because bonuses and commissions aren’t guaranteed and they can fluctuate from year to year.

Most lenders apply a concept called “shading” to variable income.

This means they’ll only include 75-80% of your commission or bonus income in their calculations, and sometimes as low as 50%.

And even then, lenders often want to see a two-year track record of you receiving that income, meaning you’ll typically need to have been in the role for more than three years to show two full bonus payments.

If you’ve just started a new sales or commission-heavy role?

That income might not be counted at all. And if your first bonus comes in less than a full year, you may need to be in the role for three years before lenders will fully factor it into your borrowing power.

The ‘Shading’ Effect: Why You Won’t Get 100% of Your Bonus or Commission

Let’s take bonuses as an example:

Some lenders use your most recent bonus figure.
Others prefer a two-year average, which smooths out highs and lows.
The most conservative lenders take the lower of the two.
To demonstrate two full years of bonus income, you’ll typically need to have been in your role for at least three years.

Then they apply shading to whatever number they accept.

So, if your two-year bonus average is $40,000, only 80% (or $32,000) might actually be included.

While most lenders apply shading, there are some specialist and non-bank lenders who may accept 100% of your bonus income.

However, this often comes with trade-offs, such as higher interest rates or stricter loan terms

Overtime Income: Who Gets Full Credit and Who Gets Less?

Overtime is treated a little more generously, especially for workers in essential services like health care or emergency response.

Nurses, paramedics and police officers may have 100% of their overtime counted, provided it’s regular and well-documented.

In other industries, some lenders will still shade overtime by 20%.

Higher Duties Allowances: When They Count and When They Don’t

Higher duties allowances are paid when someone temporarily steps into a more senior role and earns a higher rate of pay as a result.

These arrangements can vary widely, and how they are treated by lenders depends on the stability and length of the higher duties.

If the higher duties are stable or have been in place long-term, some lenders may accept 100% of this additional income.

However, other lenders may apply 80% shading, depending on how permanent or ongoing the role appears to be.

For instance, a doctor acting in a senior hospital position for an extended period may be treated more favorably than someone filling a short-term management vacancy.

In some cases, lenders may not consider higher duties allowances at all, especially if the arrangement is seen as temporary or uncertain.

Bottom Line: Maximizing Your Borrowing Power with Your Strategic Mortgage Broker

If variable income is a significant part of your earnings, it’s crucial to work with an expert strategic mortgage broker who understands how to match your specific circumstances with the right lender.

This ensures your full income potential is recognised, helping you borrow the right amount for you, to maximise your investment potential or secure the ideal long-term home.