Understanding Mortgage Allowances: What You Need To Know

Allowances on mortgages can refer to a few different concepts. One interpretation is that allowances are additional forms of income, such as bonuses, overtime pay, or shift allowances, that can be included when calculating one's total income for a home loan. Another interpretation is that allowances refer to seller concessions, where the seller provides funds or credits to the buyer to cover expenses like repairs or closing costs. Finally, in the context of government support, allowances may refer to Support for Mortgage Interest (SMI) loans, which are available to eligible homeowners or shared ownership property owners who receive certain qualifying benefits.

Shift allowance mortgages

Shift workers often face challenges when applying for mortgages due to the unconventional nature of their work schedules. However, there are lenders and mortgage brokers who understand shift work and are willing to include shift allowances in their serviceability assessments. These professionals can help shift workers secure a shift allowance mortgage by considering their unique income structure, which may include shift allowances, weekend penalty rates, and night work penalty rates.

When applying for a shift allowance mortgage, it is essential to provide documentation that verifies your income, such as payslips or letters from your employer. Some lenders may require multiple documents, while others may be more flexible and accept a single form of proof. It is also beneficial to demonstrate consistency in your shift allowances over time. Lenders typically view shift allowances and overtime income differently, with shift allowances being considered a fixed percentage of your base salary and overtime income being more variable.

The amount you can borrow with a shift allowance mortgage depends on various factors, including the consistency of your allowances and the length of time you have been in your job. Some lenders may allow you to borrow up to 95% of the property value, or even 100% if you have a guarantor. If you have been in your job for three months, certain lenders will consider 80% of your overtime income, while others will consider 100% of your overtime income after two years of consistent allowances.

It is worth noting that not all banks and lending institutions view shift allowances and penalty rates in the same way. Some may include them in their calculations, while others may be hesitant to do so. It is important to shop around and consult with mortgage brokers who specialize in shift allowance mortgages to find the right lender for your situation. These brokers can assess your case individually and pair you with a lender who understands your income structure and is willing to offer competitive rates and loan packages.

In addition to shift allowance mortgages, there are also government-backed schemes that can help shift workers get onto the property ladder. Examples include the Lifetime ISA, which offers a 25% bonus on savings used for buying your first home, and the Help to Buy equity loan scheme for first-time buyers of new-build properties. Council tenants and housing association tenants may also benefit from the Right to Buy scheme, which allows them to purchase their rented home at a discounted price.

Support for Mortgage Interest (SMI) loans

The amount of interest paid through SMI is calculated using a Standard Interest Rate (SIR), which is currently set at 3.66%. If the recipient's mortgage has a lower interest rate than the SIR, their SMI payments will exceed the interest charged, and they will receive additional support towards their mortgage payments. Conversely, if their mortgage interest rate is higher than the SIR, or their loan amount exceeds the limit, the SMI loan will only cover a portion of the interest charged. It is important to note that SMI does not contribute to reducing the capital of the mortgage; it solely assists with the interest payments.

SMI loans are distinct from traditional loans in that they do not require a credit check and typically do not impact the recipient's credit rating or benefits. Additionally, repayment of the SMI loan, including the interest accrued, is only required when the property is sold or transferred to a new owner. This repayment is usually made from the remaining equity of the property sale. However, individuals can choose to make voluntary repayments to reduce the total interest owed. It is worth noting that the interest for an SMI loan is compound interest, meaning that it accumulates monthly based on the total amount owed, including interest from previous months.

Before applying for an SMI loan, it is recommended to explore various options and seek financial advice. Alternative methods to manage mortgage payments include extending the mortgage term, utilising savings, borrowing from friends or family, or obtaining a loan from a credit union, bank, or building society. Each of these options has its own considerations, such as potential impacts on benefits or higher overall interest costs. Individuals can refer to resources like the Citizens Advice Bureau or the MoneyHelper website for guidance and tools, such as the Benefits Calculator, to make informed decisions about their financial choices.

Seller concessions

When buying a house, you pay closing costs and fees to cover the costs of getting the mortgage. Closing costs usually range from around 3% to 6% of the home price. In some cases, you may be able to get the seller to pay for some of these closing costs. These are called seller concessions, and they can be a powerful way to save on your closing costs.

Seller concession limits are not uniform—they depend on the buyer's mortgage loan. Here are some common types of loans and their associated seller concession limits: Conventional Loans: Seller concession limits for conventional loans typically range from 3% to 6% of the home's purchase price. FHA Loans: The Federal Housing Administration (FHA) allows seller concessions of up-to 6% of the home's purchase price or the appraised value, whichever is lower. VA Loans: The Department of Veterans Affairs (VA) typically allows seller concessions of up to 4% of the home's purchase price. USDA Loans: The United States Department of Agriculture (USDA) loan program permits seller concessions of up to 6% of the home's purchase price.

Your real estate agent is the best person to help you decide when and how to negotiate seller concessions depending on your local market condition and the house value. Although obtaining seller concessions can undoubtedly be advantageous for the buyer, it may also make your offer less attractive to the sellers since it could diminish their proceeds from the sale. In a seller’s market or a multiple-offer situation, asking for seller concessions could cost you the house.

Pension allowances

When considering how to manage your finances, it is important to weigh up the options of paying into a pension fund or making overpayments on your mortgage. Both are good financial practices, and it is a good idea to seek independent financial advice before making a decision.

If you have spare cash, you may want to consider whether to use it to overpay on your mortgage or save more into your pension. While mortgage rates remain relatively high, some people may prioritise reducing their mortgage balance before remortgaging, rather than paying into their pension. However, paying more into your pension is likely to give you a better financial outcome, especially if your income takes you into a higher-rate tax band. When contributing to a pension, you receive a tax rebate at your highest marginal rate, which would be lost if you paid off more of your debt. Many employers will also match additional contributions up to a certain level. However, as interest rates rise, paying off your mortgage debt sooner could help reduce your outgoings and the chances of a mortgage rate hike.

You are entitled to receive tax relief on up to a certain amount of pension contributions each tax year, known as your Annual Allowance. For the 2024/25 tax year, the Annual Allowance is £60,000. Making pension contributions can bring down your overall income and reinstate your personal allowance. However, you must be mindful of the annual pension allowance—if you overpay your mortgage, it could lead to insufficient retirement savings. Focusing solely on your mortgage and not making pension contributions means you could miss out on higher employer contributions and a potential tax advantage.

Support for Mortgage Interest (SMI) is a benefit for homeowners to help pay towards the interest on a mortgage or home improvement loans. If you do not receive Pension Credit, you could get help paying interest on up to £200,000 of your mortgage or loan. If you do receive Pension Credit, you could get help on up to £100,000.

Overtime income

Lenders will consider overtime income as part of your mortgage application, but the amount they will take into account can vary. Most lenders will allow you to use up to 25% of your annual overtime income, while some may consider up to 50% or even 100%. The more stable and consistent your income, the better your chances of getting approved for a larger mortgage.

To include overtime income in your application, you will need to provide documentation such as tax returns, W-2s, and pay stubs for the previous one to two years. Lenders will want to see a history of receiving overtime income and may require a letter from your employer stating that your overtime earnings are expected to continue. If you have recently changed jobs, lenders will need to verify that your overtime will continue at your new place of employment.

Keeping accurate records of your income is crucial when applying for a mortgage with non-traditional sources of income like overtime. Lenders will assess your overall financial situation, including your credit score and debt-to-income ratio, so it is beneficial to pay off any existing debt and build up your savings. Getting pre-approved for a mortgage can also give you a clear understanding of your budget and increase your chances of securing the home of your dreams.

Using your overtime income to make extra payments on your mortgage can help you pay it off faster, save money on interest, and improve your credit score. You can decide to make extra payments each month or make a lump-sum payment once you have accumulated a certain amount of overtime income. Consistency is key when making extra payments to ensure you stay on track with your financial goals.

Frequently asked questions