Bonus, Commission and Overtime Income

Key takeaways

• Variable income is averaged over one to two years, then shaded.
• Shading percentages vary widely by lender - this is a shopping decision.
• Some essential-services occupations get more generous overtime treatment.
• A declining trend is assessed on the lower recent figure, not the average.

Why is variable income shaded?

Because a bonus is not contractual. Base salary continues unless you are dismissed; a bonus can be zero next year for reasons entirely outside your control - a bad company year, a changed scheme, a new manager.

A lender lending on the assumption that a discretionary bonus recurs is taking a risk the borrower has no control over. Shading builds a margin against that.

The same logic applies with different weight to each type. Commission for a salesperson whose entire remuneration model is commission-based is more predictable in aggregate than a discretionary annual bonus, and overtime in an occupation that structurally requires it is more predictable again.

How is each type treated?

Essential-services overtime is a genuine and underused distinction. Several lenders assess overtime for police, ambulance, fire, nursing and some other occupations more generously, on the basis that the overtime is structural to how the service operates rather than discretionary.

How do you present variable income well?

The presentation genuinely changes the outcome, because the assessor is trying to establish whether the income is durable.

1. Supply two years, not one. Two years of income statements let a lender average rather than guess, and averaging usually helps.
2. Get an employer letter confirming the bonus or commission structure and that it is expected to continue.
3. Explain a dip. A year affected by parental leave, illness or a restructure should be explained in writing, not left to be read as a downward trend.
4. Show year-to-date figures alongside the historical average to demonstrate the current year is tracking consistently.
5. Choose the lender to the income type. The variation in shading between lenders on the same income can change borrowing capacity by a substantial margin.

One caution: if your income is trending down, the average will not save you. Most lenders will use the lower recent figure where the trend is clearly declining, on the reasonable basis that the average overstates what you will earn next year.

Frequently asked questions

How much of my bonus will a lender count?

Typically a portion of the average over the last one to two years rather than the full amount, with the percentage varying by lender and income type. Because the variation between lenders is wide, it is worth comparing.

Do lenders count overtime?

Yes, generally averaged over six to twelve months and partially shaded. Some lenders assess overtime more generously for essential-services occupations where overtime is structural to the role.

How long do I need to receive commission before it counts?

Commonly twelve to twenty-four months, so the lender can establish an average. A shorter history may be accepted where the commission structure is contractual and evidenced by the employer.

What if my bonus went down last year?

Most lenders will use the lower recent figure rather than the two-year average where the trend is clearly declining. If the dip had a specific cause - parental leave, illness, a restructure - explain it in writing at lodgement.

Related reading

• Casual, Contract and Gig Income
• The Borrowing Power Formula: Income, HEM, Buffers and Debts
• Why Borrowing Power Varies $200,000 Between Lenders

Sources

• Credit licensing: Responsible lending conduct (RG 209) — ASIC
• Moneysmart - applying for a home loan — ASIC