Editor's note: This brief was summarised by The Property AI Newsroom from a report by Mortgage Solutions. Read the original article for full details.
Private Equity Income Remains Difficult for Mortgage Lenders to Assess
Mortgage lenders continue to face challenges in recognising the full earnings of private equity professionals, especially when it comes to irregular income such as carried interest. According to David Walsh, co-founder and director of Kite Mortgages, traditional affordability models often fail to account for a significant portion of these professionals' income.
The report highlights that while salary and cash bonuses are generally considered by lenders, carried interest is much harder to accommodate. This is due to its irregular payment schedule, dependence on fund performance, and its historical treatment as a capital gain rather than income. As a result, a large portion of private equity professionals' earnings may not be reflected in mortgage affordability calculations.
Automated affordability models used by mainstream lenders typically categorise income into standard groups, such as employed or self-employed, and may exclude more complex income streams like carried interest and profit-share distributions if they do not fit predefined criteria. The treatment of variable income also varies, with some lenders averaging earnings over several years or using the lowest recent figures, which can further reduce borrowing power for those with fluctuating incomes.
The article notes that even when income is recognised, lenders' approaches differ significantly. Salary is usually counted in full, but bonuses and more complex remuneration may be discounted or averaged. Unvested income is generally not considered, and carried interest is typically only recognised once it has been received and evidenced. Lenders are more likely to accept consistent payments over consecutive years rather than one-off windfalls.
To address these challenges, some lenders have expanded specialist large-loan teams where senior underwriters assess cases individually. Private banks may also offer greater flexibility by considering a client's overall wealth and assets, rather than relying solely on formula-driven assessments. The way a case is presented to underwriters can also influence the outcome, especially for complex income structures.
Interest-only mortgage structures are noted as potentially effective for private equity professionals, whose wealth is often built through carried interest and fund distributions rather than regular monthly salaries.
Source: Mortgage Solutions