Case study: property developer with ‘lumpy’ income
Alongside corporate executives and financial professionals – and even celebrities – we find that property developers are often among our clients with complex finances. For these individuals, income might vary from year to year, as it can depend on their pipeline of property projects.
Figures from JLL shows that commercial construction activity increased by 7.4% in Q2 2018, the most recent period for which figures are available, and 32.3% on Q2 2017. But these positive figures don’t necessarily mean steady, predictable revenues for developers, which can throw up problems for individuals looking to borrow in a personal capacity.
Here at Investec, we recently used our knowledge of the property sector to help a client in this position, offering an interest-only mortgage.
We were approached by a commercial property developer whose income varied from year to year, as it was dependent on the completion of long-term projects.
The client was looking to secure a 10-year, interest-only mortgage to purchase their main home at a loan to value of over 70%. This individual intended to repay the capital using profits generated by the completion of commercial projects; however, looking at their 2017 returns in isolation suggested that the client might not be able to support the size of loan.
We looked at the bigger picture and, instead of focusing on the profits of only one year, we analysed the profits from the last three years and spent time understanding the client’s income structure. Income from 2015 was higher than 2017 – and indicative of the client’s typical earnings – so we took an average of the client’s earnings over that three-year timeframe.
We also examined their pipeline of projects so that we could forecast future earnings and understand how this could be used to repay the mortgage.
Individuals with lumpy incomes can struggle to secure a mortgage, especially if the lending decision is based on a single year only. Here at Investec, we take a more holistic view of our clients’ finances and, in cases like this one, can also take future projects into account given our expertise and understanding of the property sector.