Lending to Commission Earners
Most sales professionals earn commission income. However, when applying for a home loan the commission income component does not get treated the same way as the base income and lenders vary in the way they will assess commission income. This could result in you not getting the borrowing amount you need.
Most lenders will “shade” commission income – usually taking only 80% of the value of it when assessing your ability to repay a loan. As an example, if you earn a base salary of $100,000 and commission income of $100,000 then the lender will use 100% of your base salary but only 80% of your commission income. In this case, despite you earning $200,000 in a year, the lender will only use $180,000 of it to assess your income.
The next challenge is how lenders will calculate your annual commission income. Some will take the lesser of the past two years as shown on your PAYG summaries while some will take the average of the two years. Others may only look at your current year to date earnings. If your commission income varies significantly from year to year then lenders may apply their own ad-hoc rules to your income.
The upshot of this is that it is a real minefield out there for those of you who are earning commission income, especially if you are trying to borrow close to your servicing limit.
Your mortgage broker will know the policies of the lenders and can help you find the right loan for your situation. For tricky cases, we can even ask lenders to pre-assess the commission income before making a formal loan application. This will give you assurance that your sales commission income won’t be an issue.