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1. What is “income annualisation” in the context of home loans?
Income annualisation refers to a process for assessing the borrowing capacity of people with irregular or seasonal incomes when it comes to home loans.
Income annualisation helps lenders assess a borrower’s average or typical income based on historical financial data, providing a more accurate picture of their repayment capacity when earnings fluctuate. This process is useful for people with varying income, or those who earn through commissions and/or bonuses and allowances.
2. Why do lenders need to annualise income?
Lenders annualise income for home loans to accurately assess a borrower’s ability to repay the loan, especially for people with inconsistent income throughout the year. Through income annualisation, lenders will not just look at a single month’s pay, providing an individual’s true earning potential.
3. Do all lenders accept annualised income the same way?
Lenders implement different policies to assess annualised income. Some are flexible, accepting a wider range of income sources which can greatly help people who have inconsistent income throughout the year. Meanwhile, some lenders have stricter guidelines and may ask for specific documents and income levels for loan applications.
Also, a lender’s risk tolerance can directly affect income annualisation applications. Those with higher risk tolerance may be willing to consider individuals with less predictable income sources. Our experienced mortgage brokers will advise you on what lenders suit your financial situation best.
4. How does annualising income impact my borrowing capacity?
Income annualisation can significantly affect your borrowing capacity for a home loan. An annualised income higher than your income in a single low-earning period leads to a higher borrowing capacity as lenders are confident you can repay the loan based on your overall earning potential.
Lower annualising income due to past income fluctuations or periods of low earnings can lead to lower borrowing capacity. Therefore, the impact of annualised income on your borrowing capacity depends on how the lender assesses your income and risk.
Lenders typically do not need to annualise your income if you have consistent income over time. However, consistency generally results in higher borrowing capacity compared to income, which fluctuates significantly. Make sure your supporting documents are updated and complete to greatly influence the lender’s assessment.
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