As a specialist mortgage broker in the UK, I understand that navigating the property market can be complex, especially when it comes to understanding how different types of income, such as Restricted Stock Units (RSUs), can impact your mortgage eligibility.
In 2021, loans with a Loan-to-Income (LTI) ratio of 4 or above accounted for 12.4% of gross mortgage lending. This indicates a significant portion of borrowers have high income, potentially from diverse sources like RSUs.
RSUs are a form of compensation offered by many tech companies, including giants like Amazon. They vest at regular intervals and can form a substantial part of an employee’s income. However, not all lenders consider RSUs as valid income for mortgage affordability calculations.
This is where we come in. We specialise in helping clients with RSU income navigate the mortgage landscape. We have a deep understanding of the lenders who accept RSU income and can guide you towards the most suitable options.
Whether you’re a first-time buyer or looking to move up the property ladder, understanding how your RSU income can be leveraged for mortgage purposes can open up new possibilities. Stay tuned as we dive deeper into this topic and provide you with the information you need to make informed decisions about your property journey.
Definition of restricted stock units (RSUs) income
Restricted Stock Units (RSUs) are a form of employee compensation where the employer grants a certain number of company shares to an employee, which is then subject to a vesting schedule. When applying for a mortgage, the impact of RSUs on income calculations is important to consider. These units are treated as income and can be included in the applicant’s total income, which can affect their debt-to-income ratio and overall borrowing potential.
The factors that determine RSU vesting include the number of service years completed by the employee and any potential stipulations set by the employer, such as performance targets or other conditions. The vesting schedule dictates when the RSUs become fully owned by the employee, allowing them to be converted into actual company shares.
In the mid-2000s, an accounting scandal involving stock options resulted in a shift from stock options to RSUs as a more transparent form of employee compensation. RSUs became a more popular choice for companies as they are accounted for as a direct expense, making financial reporting more straightforward and clear.
When reporting RSU’s income on a mortgage application, it is essential to understand the impact of these assets on income calculations and to provide accurate documentation of RSU holdings and vesting schedules.
Importance of RSUs income for mortgage applications
RSU income can be a valuable asset when applying for a mortgage. Lenders often consider RSU income as part of a borrower’s total income, which can increase their borrowing power. However, there are specific criteria and limitations when using RSUs as income for a mortgage application.
When applying for a mortgage, lenders typically require a history of consistent RSU income. They may also require documentation, such as vesting schedules or a letter from the employer, to verify the RSU income. Additionally, some lenders may only consider a portion of the RSU income, depending on the likelihood of continued vesting.
RSUs can also be used as a deposit for a mortgage, but the exact requirements will vary by lender. Borrowers should be prepared to provide documentation of the RSU value and vesting schedule when using RSUs for a deposit.
Why Owning a Home with RSUs Matters?
The impact of RSUs on borrowing power and interest rates can be significant, as it adds to the borrower’s total income. However, the specific impact will depend on the lender’s policies and the borrower’s overall financial situation.
RSU income can play a crucial role in mortgage applications, but borrowers should be aware of the criteria, limitations, and documentation required when using RSUs as income or for a deposit.
What are the Challenges of Using RSU Income for Mortgages?
Using Restricted Stock Units (RSUs) as income for mortgage applications can be tricky. Here’s why:
1. Lenders Might Be Skeptical
Not all lenders are familiar with RSUs, and they might not accept them as qualifying income. This is because RSUs are a complex financial tool, and their value can fluctuate based on the company’s stock price.
2. Income Stability Matters
Lenders prefer predictable income sources for mortgages. Since RSUs can be volatile, they might not be seen as reliable income for a mortgage.
3. Vesting Schedules Can Be a Hurdle
Lenders typically want to see a history of RSU income for at least a couple of years before considering it for mortgage applications. They also want to know about your vesting schedule, both past and future.
4. Other Factors Can Complicate Things
If you have other factors like non-sterling income, dual-taxation arrangements, or a fixed-term contract, it can make using RSUs for your mortgage even more challenging. Being a foreign national on a visa can also add complexity.
5. Beyond Income Multiples
Mortgage affordability calculations go beyond just your income. Lenders consider your net income, other debts, dependents and even stress test your finances based on hypothetical interest rates.
What are the Benefits of using RSUs for mortgages?
While using RSUs for mortgages has its challenges, there are also some potential advantages to consider:
1. Increased Borrowing Power and Affordability:
- RSUs can supplement your traditional income, potentially boosting your borrowing power and allowing you to qualify for a larger mortgage. This can open doors to buying a bigger house or a property in a more desirable location.
- Lenders may consider the future value of vested RSUs, allowing you to secure a mortgage based on your anticipated income growth.
2. Diversification of Income Streams for Stability:
- RSUs add another income stream to your financial portfolio, potentially reducing your reliance on a single source of income. This can provide greater financial stability and security, especially if your primary income source is susceptible to fluctuations.
- Diversification can also mitigate the impact of economic downturns or job losses, as RSUs may not be directly tied to the broader market.
3. Potential Long-Term Financial Growth:
- If your company performs well, the value of your RSUs could appreciate significantly over time. This can translate into substantial long-term wealth creation, potentially exceeding the initial challenges of using RSUs for a mortgage.
- Owning stock in your company gives you a vested interest in its success, potentially increasing your motivation and engagement at work.
How RSUs are granted to employees in tech companies?
Restricted Stock Units (RSUs) are a way tech companies compensate employees with ownership in the company. Here’s the lowdown:
Getting RSUs: You might be awarded RSUs when you join, annually , or for exceeding targets. Imagine receiving 100 RSUs with a four-year vesting period at onboarding.
Vesting Schedule: RSUs come in stages, not all at once. In our example, 25% (25 shares) would vest each year.
Taxes: No worries about taxes when you’re granted RSUs in the UK. You only pay when they vest, similar to your salary. Expect income tax and national insurance, then.
Remember: Specific tax rules depend on your situation, the RSU setup, and the vesting schedule. Consulting a financial adviser is always wise to get the full picture.
Getting a restricted stock units income mortgage is a complicated task that requires careful consideration and planning. So, we would suggest you always contact a specialist mortgage broker to help you with such specialist mortgage products. Our team at needingadvice.co.uk has extensive experience in helping individuals navigate the complexities of RSU income and secure mortgages that meet their needs. Contact us today for personalised guidance and support throughout the mortgage application process.
FAQs – Restricted Stock Unit Income for Your Mortgage
What are Restricted Stock Units (RSUs), and how do they work?
Restricted Stock Units (RSUs) are a type of equityThe difference between the value of the property and the amo... compensation often used by tech companies and publicly traded companies to incentivize employees. They represent a promise to grant a set number of shares of company stock or a cash payment equal to the value of a set number of shares at a future date, following a vesting schedule. The value of RSUs is based on the current stock price of the company’s shares.
How can Restricted Stock Unit income be used for a mortgage?
RSU income can be considered by mortgage lenders as part of your total compensation package when assessing your mortgage application. This income is often viewed similarly to bonusIncome received as a bonus, which may affect a borrower's ab... income, forming part of your overall income for mortgage qualification. However, lenders typically require a regular history of such compensation and may use the 52-week average stock price to determine its value.
What are the guidelines for using RSU income to qualify for a mortgage loan? Mortgage lenders typically look for a consistent history of RSU income, often over a period of two years, shown on tax returns and bank statementsA record of a borrower's financial transactions often requir.... They will consider the vesting schedule, the stability of the income stream, and the performance of the company’s stock. The RSU income is usually factored into your total income ratio to determine loan eligibility.
Can RSU income be considered as part of your income for mortgage purposes in the UK?
Yes, in the UK, RSU income can be considered as a source of income for mortgage purposes. Lenders will assess this as part of your overall income, including basic salary, bonus income, and other forms of income like rental income. Verification of employment and a stable income stream from RSUs are crucial for this assessment.
How do lenders calculate RSU income when applying for a mortgage?
Lenders calculate RSU income by looking at the vesting schedule and the current share price or the average share price over a certain period, such as the 52-week average. They assess the regularity and predictability of this income, considering factors like the volatility of the stock price and the company’s performance milestones.
Are there specific considerations when using RSUs as income for a mortgage application?
Yes, lenders consider the type of company issuing the RSUs, the stability of the stock price, and the employee’s position within the company. For high-tech companies or startups, lenders may be more cautious due to potential stock price volatility. The RSUs should be a regular part of the compensation package, not a one-off payment.
Can stock income, including RSUs, be used as collateral for a mortgage? Generally, stock income like RSUs is not used as collateral for a mortgage. Instead, it’s considered as part of your income stream for assessing your ability to make regular mortgage payments. However, some private banks might consider shares of stock as part of the overall wealth assessment for large loan sizes.
How does RSU income impact mortgage eligibility and what documents are needed?
RSU income can positively impact mortgage eligibility if it’s a significant and regular part of your income. Lenders will require documentation such as vesting schedules, tax returns showing RSU income, bank statements, and verification of employment from the tech firm or public company.
Do RSUs count as income for a mortgage if they are not sold?
Yes, vested RSUs can count as income for mortgage qualification even if they are not sold, as they are considered a form of compensation. The valuation is based on the fair market value of the vested shares.
What tax implications should be considered for RSU income in the context of a mortgage in the UK?
In the UK, RSU income is subject to income tax and National Insurance contributions when they vest, which can affect your net income. This should be considered when calculating your income for mortgage qualification, as the taxable income may be lower than the gross value of the RSUs.
How can I avoid tax on my RSU when using it for a mortgage?
Avoiding tax on RSUs is challenging as they are typically taxed as ordinary income upon vesting. However, strategic financial planning, such as spreading the vesting over several years or selling shares in a year with lower overall income, can minimize tax liability. Consult a tax advisor for personalized advice.
How should RSU income be reported for mortgage applications?
RSU income should be reported on your mortgage application as part of your total income. You’ll need to provide documentation such as your tax return, which shows the RSU income, and a letter from your employer detailing the RSU agreement, including the vesting schedule and the value of the RSUs.