Trust Income Mortgages

Can I get a mortgage using income from a trust?

Yes, next question. A nice quick podcast today!

In reality, anyone in this area knows it’s complex. What is really key is the assessment of your personal situation. For example, ‘trust’ is a very broad phrase. We’ll get into more detail on that as we go.

We need to understand how provable the income is. If for example, it’s just bank statements, who operates the trust? How is it managed? What are the underlying assets?

There are lots of questions, and from the start we need to focus on what we can prove. That will then drive the lenders we go to. Through the rest of this podcast, we’ll explore exactly how that works.

What is trust income? How does it impact mortgage applications?

A trust by its nature is a collection of funds held on your behalf, that you benefit from. Technically, you don’t own it. Trustees are appointed to pay up monies or manage the assets as suits you. This is why it’s so varied in how it operates.

It might be shares, property or anything that’s a valuable asset, managed on your behalf. What we’ve got to really understand is what conditions there are.

As an example, a guy I used to work with many years ago was an estate agent. There was a clause in his trust that he had to have a full-time job. He was on a basic salary from an estate agent while having a big trust in the background – it was a funny quirk to that trust.

Within the technicalities of mortgages, this falls into the bracket of unearned income. Like investment income in general, lenders don’t like it. I’ve always found that very odd, because it means you’ve got income whether you work or not, so why don’t lenders like it?

But it’s about how it’s processed by the bank. A tiny proportion of people are beneficiaries of a trust. So will a very large lender change their processes to cater for it? It’s really just that.

Can you get a mortgage with trust income as your only source of income?

This builds on the last point. If you have what’s deemed unearned income, many banks need you to have another source of money. You could be employed, self-employed or have another source of income for the main lenders.

But you can absolutely do it if it is your sole source of income. I’ve dealt with this many times over the years. That’s not a problem whatsoever.

It goes back to what funds there are and how sustainable it is. We need to be comfortable on that. As long as we can evidence the sustainability of the income, it’s fine, but probably not for the majority of high street banks. We may have to go to smaller lenders, which isn’t a bad outcome because they simply understand this better.

How do lenders assess a mortgage with trust income?

We usually need to see a minimum of three to six months’ bank statements proving the income you’ve received. If that’s not very clear, we might look at tax returns, because if it’s UK investment income it should show on those.

We might need letters or evidence from the trustees if they’re happy to put a reference together. If lenders are asking if the income is sustainable or about the underlying asset, a reference request might go to the company.

How much can I borrow with a trust income?

As always, it varies and the variance is quite wide. At the least generous end, some lenders don’t include it at all. Of the lenders that do, some just factor it in at a multiple of one. For example, let’s say you’re receiving £5,000 a month – that’s £60,000 annually. With a multiple of one you can then borrow an extra 60,000 pounds.

Other banks are more generous and use the normal affordability model, where you can borrow up to, say, five times your income. So, using that same example of £60,000 trust income, one lender might offer you a mortgage of £60,000 but the next would offer you £300,000. It’s a very big difference, and that’s why that affordability assessment is key.

The caveat that always comes in here is that the borrowing is based on income minus your other outgoings. Your outgoings will also be factored in.

What deposit is required when getting a mortgage with trust income? Can I get a mortgage with trust income and a small deposit?

The usual rules apply whether it’s trust income or any other form of income. The minimum deposit is generally 5%, depending on market conditions. Some banks do offer 100% mortgages.

We then consider whether that bank offers mortgages using trust income. You’re probably going to find you need to round about 10% deposit as the minimum.

The ideal deposit is 40%, because when you’re borrowing 60% of the property’s value or less, you get the right pricing. It tends to be graduated, so from a 10% deposit starting point, up to 15% then 20% and so on, the rate decreases slightly till you hit that magic 40%.

What evidence do I need to provide for trust income when applying for a mortgage?

Just to recap what we said earlier, we need your bank statements and potentially a reference from the trustees. Your tax return can be very helpful as well.

Where it can get complex is if it’s non-UK income. Post Brexit, that’s become a huge issue across the board. If you’re not a UK resident or don’t earn sterling income, it’s tricky.

I’m helping a client right now who actually pays UK tax on his income, but it’s denominated in US dollars. Even though it’s UK income, most banks don’t include it because it’s in dollars. If you have anything that’s not sterling, you do have to be careful. I’m just inserting that there because it does come up more in this area.

How does trust income frequency affect my mortgage application?

Again, it’s the same as with all mortgages. The most favourable assessment would always be monthly. Mortgages are driven by affordability and if you can evidence a clear monthly income, banks like that and will factor in all that income.

That sometimes stretches to quarterly, as well. So with monthly or quarterly income, generally 100% is included. If it’s annual, some banks discount that. Not always – some banks will take all of it, particularly if you have a two or three year track record.

In the worst case, some banks only take half of any income paid annually. It’s the same assessment as when you have bonuses with work. Let’s say your trust income is £100,000 a year and it’s paid monthly. One lender would offer you £500,000 – five times that figure.

But the same lender might only offer you a loan of £250,000 if it’s paid annually, because they only include half of it. It does have a big impact in the assessment, but more importantly it will drive which lenders we approach.

We know which banks offer 100% or 50% of the income, and sometimes it’s just not relevant. For example, you might not need to factor all of it into the loan. If you need to increase your borrowing by £100,000, the assessment can be irrelevant because you still get what you need.