Fox Davidson advise clients wishing to take out a mortgage on UK property. Many of our clients work at investment banks and large US headquartered tech firms, with some of them being awarded stock and deferred compensation which will vest on a regular basis.
We regularly receive questions about the feasibility of using stock or RSU income for mortgage purposes, many of which we have addressed in our guide below.
What are stock options?
Stock options are a type of equity compensation that gives employees the right to purchase a certain number of shares of the company’s stock at a specified price (known as the “exercise price”) within a certain period of time. The purpose of stock options is to align the interests of employees with those of the company’s shareholders, by giving employees a stake in the company’s success.
Vesting is the process by which an employee earns the right to exercise their stock options. Vesting typically occurs over a period of time (such as four years) or upon the achievement of certain performance milestones (such as reaching a certain sales target). When a stock option vests, it means that the employee has earned the right to exercise the option and purchase the shares of stock at the exercise price.
For example, if an employee is granted 100 stock options that vest over four years, they may receive 25 options per year over the four-year period. Once the options have vested, the employee can purchase the shares at the exercise price any time before the expiration of the option.
What are Restricted Stock Units (RSU)?
Restricted stock units (RSUs) are a form of equity compensation issued by companies to employees as a form of non-cash compensation. RSUs are like stock options, but unlike stock options, employees do not have to pay anything to acquire the shares and the shares are not immediately vested. Instead, the shares are restricted and vest over time, or upon the achievement of certain performance milestones.
It is common for publicly traded companies in the UK and other countries to offer RSUs as a form of compensation to their employees.
Can I use vested stock as income for mortgage purposes?
Some mortgage lenders will use vesting stock in their affordability calculations. Lenders will look at the history of compensation awarded and a borrower’s vesting schedule, both historically and projected. Some mortgage lenders are willing to use 100% of vesting stock for affordability purposes.
Can I use RSU income for mortgage purposes?
It is possible to use RSU income for mortgage purposes. Mortgage lenders like to see a history of RSU income over a couple of years to get comfortable with using it in their affordability calculations.
Can I use bonuses for mortgage purposes?
Mortgage lenders will use up to 100% of bonus income when calculating how much they can lend. The amount of a bonus a mortgage lender will use depends on the frequency (monthly/quarterly/annually) of the bonuses, and for how long they have been paid.
Can I use a bonus paid in dollars or another foreign currency for UK mortgage purposes?
Some mortgage lenders will accept bonuses or commission paid in a foreign currency (non-sterling). The compensation will be converted into sterling and treated in the usual way for affordability purposes.
The affect of the economic outlook on stock options
There are several factors that will affect a mortgage lender’s decision on how much bonus or vested stock they can use. A lender will look at the history of an applicants bonuses and may decide to average the income over several years. They may also decide to use a % of bonus – this can range from 50% to 100% of bonus/vested stock.
Another major factor for mortgage lenders is the macro environment, and that is something we pay special attention to when putting together a case for lending. During the COVID crisis of 2020, many lenders simply stopped using any form of income over and above an employees basic salary. Their reasoning was that economic uncertainty meant that it was likely that bonus income for that year and would be affected, and therefore posed too much risk to put any reliance on income from vesting stock and bonuses/commission.
Fast forward to 2023 and whilst we have left behind COVID, we do face other global uncertainties. The Russia-Ukraine conflict has meant a reduction in investment banking business and measures from central banks to combat inflation have all had an impact on the economy.
Viswas Raghavan, A CEO at JP Morgan, stated that it has been ‘a pretty anaemic year’ and that bonuses would reduce as a result. Citigroup Inc, Bank of America Corp, and Goldman Sachs also warned their investment bankers may see an income reduction of up to 40%.
A mortgage broker for RSU income & stock options
At Fox Davidson, we have a comprehensive network of lending institutions that we work with to provide our clients with the most favourable mortgage terms. One of the ways we can secure more generous mortgages for our clients is by utilising the income from vested stock and allocated RSU.
We will also look at a client’s wider assets, as some of our funders will take comfort if we can demonstrate a very strong net assets position. If we can display a portfolio of assets which are liquid, then we give ourselves some room for flexibility from many of our private bank funders.
To secure a mortgage utilising vested stock income, clients will need to provide the lender with a range of documentation, including compensation statements, vesting schedules, bank statements and evidence of their share portfolio.