Hedge Fund COO Refinances £1.8m on £2.5m Home Using Vested Deferred Compensation
The chief operating officer (COO) of a London hedge fund needed to refinance £1.8m against his £2.5m home in Surrey before a fixed rate expired. Half of each year's bonus was deferred, and a lender reading only his salary and upfront cash would have fallen short of the loan already on the property. A clearing bank counted the vested deferred tranches he had already been paid through payroll, recognised £400,000 of income, and the remortgage completed with no time on the standard variable rate.
Client Snapshot
£2,500,000
Property value
£1,800,000
Remortgage (like-for-like)
72%
Loan to Value (LTV)
Chief operating officer (COO) of a London-based multi-strategy hedge fund · Detached Edwardian house, Esher, Surrey · Like-for-like remortgage, no additional borrowing · Part-and-part: £800,000 capital and interest over a 24-year term, £1,000,000 interest-only; three-year fixed rate
Key constraint
Fixed rate expiring within three months; on a salary-plus-upfront-bonus reading, the recognised income did not support the loan already on the property
Context
Half of every bonus at the client's fund arrives late: 50% is paid in cash at award, and the rest vests in equal tranches over the following two years. He joined the fund as COO four years ago from an investment bank, where he had been head of business management and bonuses were paid mostly upfront. The five-year fixed rate on the Esher house he shares with his husband, a consultant anaesthetist, was sized around that banking package; the mortgage has been in the client's sole name since the purchase, and his own income carried the assessment, so the application stayed sole this time too. With £1.8m outstanding, the rate expiring in under three months and the existing lender's retention pricing uncompetitive at this loan size, he needed a full remortgage. A remortgage means a fresh affordability assessment, and to the wrong lender his income now looked smaller than it did the day the loan was first approved.
The Challenge
On headline numbers, nothing was wrong: a £300,000 base and a £200,000 bonus award make a £500,000 package against a £1.8m loan. An application is assessed on recognised income, though. The base was straightforward, counted in full as pay-as-you-earn (PAYE) income. The variable half was the problem. Much of the mainstream market reads deferred compensation the way it reads a share award: unvested amounts are contingent on staying in post, so several lenders may set the deferred element aside entirely, and others are silent on it. Read that way, the variable pay shrinks to the upfront cash element alone, £100,000 a year, and discretionary bonus is commonly counted at around half.
£300,000 of base at a standard 4.5 times income supports £1,350,000. Adding half of the £100,000 upfront cash element takes recognised income to £350,000 and borrowing to £1,575,000 at the same multiple. Both figures fall short of the £1,800,000 already secured on the property. A mis-placed application therefore risked a decline, or weeks on the standard variable rate (SVR) while a second application started from scratch.
The case needed a lender that read the deferral correctly, and enough time to complete before the fixed rate ran out. We cover this part of the market in our guide to mortgages for hedge fund professionals →
Lender Strategy
The case turned on the difference between deferred compensation that has been promised and deferred compensation that has been paid. An unvested tranche is a conditional promise: it depends on the client still being in post when it vests, and lenders are entitled to be cautious about it. A tranche that has vested and settled in cash through payroll is different. It sits on a payslip, it is in the P60, and it has arrived with the same regularity as the bonus it came from.
His payslips showed this clearly. In each of the last two tax years, variable cash received totalled £200,000: the £100,000 upfront element of that year's bonus, plus two £50,000 vested tranches from the two prior awards. The deferral changed the timing of the payments and nothing else.
The case was placed with a top-five UK clearing bank whose approach to variable pay works from cash received through payroll: discretionary variable income evidenced over two years may be counted at half of the two-year average, whatever the award mechanics behind it. On that treatment, two years of £200,000 average to £200,000, and half of that is £100,000. Added to the £300,000 base, recognised income became £400,000, which put the £1,800,000 remortgage at 4.5 times income at 72% LTV.
Worked example, reading the same payslips
Hedge fund COO, £300,000 base, £200,000 of variable cash received each year
The same payslips, assessed three ways.
- Base salary
- £300,000
- Annual bonus award
- £200,000 (half cash at award, half deferred)
- Upfront cash element (each year)
- £100,000
- Vested deferred tranches received (each year)
- Two × £50,000
- Variable cash received (each of last two tax years)
- £200,000
- Refinancing
- £1,800,000 at 72% Loan to Value (LTV)
£300,000 of base at a standard 4.5 times income supports £1,350,000. No variable pay counted.
Adding half of the £100,000 upfront cash element takes recognised income to £350,000 and borrowing to £1,575,000 at the same multiple. The deferred element is set aside.
Two years of £200,000 average to £200,000, and half of that is £100,000. Added to the £300,000 base, recognised income became £400,000, which put the £1,800,000 remortgage at 4.5 times income.
The same payslips throughout. Counting the vested tranches already received moves recognised income from £350,000 to £400,000, and the borrowing from £1,575,000 to the £1,800,000 the remortgage required.
Please note: These figures are for illustrative purposes only. The actual amount you can borrow will depend upon your personal circumstances, credit profile, LTV, the lender's individual criteria and a full affordability assessment.
The application was packaged so an underwriter could trace every award to the payment it became: two years of payslips and P60s showing each tranche; the bonus award letters for the last four years, separating the upfront and deferred elements; the deferral plan terms, confirming that tranches settle in cash on fixed dates rather than in fund units; and a short schedule reconciling the awards to the payslips. A covering note stated the principle in one line: nothing in the income calculation depended on an award that had not already been paid. The unvested tranches still to come were listed for completeness and excluded from the numbers.
Where a deferred element is share-linked or unit-linked rather than cash-settled the treatment differs; see our guide to equity compensation mortgages →
The Result
The Result
A £1,800,000 remortgage agreed at 72% LTV, with the vested tranches counted as income
£1,800,000
Loan
72%
LTV
£400,000
Recognised income (base + variable cash received)
4.5×
Income multiple
First call
Day 0
Decision in principle (DIP)
Within 4 working days
Full mortgage offer
Week 4
Completion
Day the old rate ended
A £1,800,000 remortgage was agreed at 72% LTV, structured part-and-part: £800,000 on capital and interest over a 24-year term, sized so the contractual monthly cost sits on base salary alone, and £1,000,000 interest-only, to be cleared in stages as future tranches vest, a repayment strategy some lenders may accept where variable pay is established. The rate was a three-year fix, priced in line with mainstream large-loan pricing at this LTV and materially below the retention offer that prompted the search. The decision in principle (DIP) came back within four working days and the offer followed in week four. Completion was set for the day the old rate ended, so there was no early repayment charge (ERC) and no time on the standard variable rate.
For borrowing at this scale more broadly, see our guide to large loans (£1m+) →
Why This Matters for Similar Clients
Deferral is now standard across hedge funds: 30 to 50% of bonus held back over two to four years is a common structure, and it applies to the business side of the firm as much as the front office. A COO or chief financial officer (CFO) whose variable pay arrives on a delay carries the same gap between headline package and recognised income, and the gap surfaces at the worst moment, when a large fixed rate is expiring. The answer is usually evidence that separates the amounts already received from the amounts still promised, and a lender chosen because its criteria read that evidence properly.
For how fund income structures are assessed more widely, see our article on why hedge fund income often needs specialist structuring →
What We Can Do for You
- Establish before any application how much of your package (base, upfront cash, vested deferred tranches) different parts of the lender market may recognise
- Time the application around your vesting schedule and your fixed-rate end date, so received income is on the payslips before an underwriter reads them
- Package payslips, P60s, award letters and deferral plan terms so a lender can trace every award to the payment it became
- Where the deferred element is unit-linked or tied to fund performance, identify lenders, including private banks, that may assess it holistically
FAQs
It can. Vested tranches paid in cash through payroll may be treated like any other bonus income, evidenced by payslips and P60s. Unvested amounts are harder: most mainstream lenders may set them aside because payment remains conditional.
Yes: where tranches have been received in cash across the last two tax years, some lenders may include them in a two-year variable-pay average, commonly at around half. The evidence is the same as for a cash bonus.
Cautiously. An unvested tranche is contingent on remaining in post, and sometimes on fund performance, so most mainstream lenders may exclude it. A private bank may weigh it as part of a holistic assessment of the whole position.
Payslips and P60s showing the tranches actually paid, award letters separating the upfront and deferred elements, and the plan terms confirming how and when tranches settle. A schedule reconciling each award to its payments helps an underwriter trace every figure.
Not necessarily. A remortgage offer can be secured in advance and completion dated to the day the existing rate ends, avoiding both early repayment charges and time on the SVR. The key is starting early, around three to six months before expiry.
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YOUR HOME MAY BE REPOSESSED IF YOU DON’T KEEP UP REPAYMENTS ON YOUR MORTGAGE
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This client scenario is an amalgamation of cases we have handled. Details have been combined and adjusted to protect client confidentiality, and it does not describe a single client or transaction.