Private equity’s biggest earnings are the hardest for mortgage lenders to recognise
The irregular nature of private equity remuneration means some of the sector’s highest earners can struggle to secure borrowing that reflects their true income, according to broker David Walsh, co-founder and director of Kite Mortgages.
Speaking to Mortgage Solutions, Walsh (pictured) said traditional affordability models often fail to recognise a significant portion of private equity professionals’ earnings, particularly carried interest.
While salary and cash bonuses can usually be assessed by lenders, carry is far harder to accommodate because it is paid irregularly, depends on fund performance and has historically been taxed as a capital gain rather than income.
As a result, Walsh said “possibly the largest portion of a person’s income counts for nothing for mortgage purposes”, despite the carry being “contractually theirs”.
Automated affordability models miss complex PE income
Walsh said mainstream affordability models are largely automated and rely on categorising income into standard groups such as employed, self-employed, basic or variable pay.
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That can leave more complex income streams, including carried interest and profit-share distributions, excluded entirely if they do not fit predefined criteria.
He added that lenders’ treatment of variable income can further reduce borrowing power, with some averaging earnings over several years or using the lower of recent figures.
Given that private equity income can fluctuate significantly depending on fund performance and exits, this can materially lower the income used in affordability calculations.
Even where income is recognised, treatment varies considerably between lenders.
“Salary gets used in full everywhere,” Walsh said, but bonus treatment “varies enormously”, with some lenders applying discounts or averaging income over multiple years.
More complex remuneration presents an even greater hurdle. Walsh noted that “anything unvested, you can generally forget about” when it comes to mainstream lending, while carried interest is typically only considered once it has been received and evidenced.
“One payment from one exit reads as a windfall, and a windfall isn’t income,” he said, adding that lenders are more likely to recognise “consistent payments over consecutive years from different realisations”.
Specialist underwriting and tailored structures fill the gap
To bridge the gap, lenders have increasingly expanded specialist large-loan teams, where senior underwriters assess cases individually rather than relying on automated systems.
“Published criteria is the floor rather than the ceiling,” Walsh said, arguing that experienced underwriters can take a more pragmatic view of complex income structures and supporting documentation.
He added that private banks often provide even greater flexibility by considering a client’s wider wealth, assets and banking relationship rather than relying solely on formula-driven affordability assessments.
Walsh also stressed that presentation can be critical when dealing with complex borrowers.
“If the outcome depends on a person understanding what they’re looking at, then how the case is put in front of them matters as much as the numbers in it,” he said.
When it comes to mortgage structures, Walsh said interest-only borrowing can be particularly effective for private equity professionals because their wealth is often accumulated through carry and fund distributions rather than a monthly salary.
“If somebody’s wealth is being built up through carry and distributions over the life of a fund, making them repay capital in parallel out of monthly salary isn’t necessary,” he said.
He also highlighted offset mortgages as an underused option, arguing that they allow borrowers to use cash earmarked for future capital calls or tax liabilities to reduce mortgage interest costs without sacrificing liquidity.
“An offset puts that money to work without locking it away,” Walsh said.
Mainstream lenders are becoming more flexible
Looking at the wider market, Walsh said mainstream lenders have become far more accommodating of complex income than in previous years, narrowing the gap with private banks.
“If it works on the high street then go to the high street, because the rates are lower and the fees are lower,” he said, adding that private banks earn their premium when borrowers need lenders to take a view on carry, overall net worth or higher loan-to-value (LTV) interest-only borrowing.
He said income multiples have also become more generous, while some lenders have begun engaging with non-traditional remuneration such as restricted stock units, suggesting a growing willingness to assess income beyond basic salary.
For now, he said lenders are increasingly targeting the large-loans market through “manual common-sense underwriting” and more flexible structures designed to accommodate clients with complex income profiles.
