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New Law Partner Mortgage
David Walsh explains how the mortgage process works if you are a new law partner.
Can I get a mortgage as a newly qualified partner?
Yes. If you have just been made up as a partner in a law firm, you don’t necessarily need the two years’ track record that most other self-employed people might need, such as a sole trader, partner or limited company director.
There are certain requirements from lenders and they do vary. But generally speaking, if you’re being made up in a law firm that has a large number of partners, they don’t necessarily need you to do your two years as self-employed.
They’ll look at any fixed element of your pay to determine an income figure for their calculations. So yes, as a newly qualified partner you could get a mortgage.
How long do I need to be a partner before I can use my new income for a mortgage?
If you have an element of your pay that’s fixed, perhaps a minimum drawing that’s going to be in your contract, we could use that straight away. A letter from the finance director or equivalent to confirm that minimum level also works. So, basically, we could get you a mortgage from day one.
A lot of the law partners we see have been an associate, senior associate or counsel at the same firm and then made up to partner. You might initially be a salaried partner, not necessarily with equity, but paid gross of tax. If you weren’t within a law firm, potentially lenders would look at you as self-employed and want two years track record.
However, if you are part of a larger firm with a clear structure in place around what you could expect as a minimum drawing, lenders will use that income straight away. So there’s no minimum requirement.
There might be additional checks. For example, some lenders will look at your salary prior to being made a partner. If you’ve gone from an associate on a PAYE basis, they’ll look at what you were paid the previous year, what you’re being paid now as a minimum drawing and just check that is reasonable.
Some of them, on a more cautious side, will use the lower income you received as an employee last year, as they don’t have that track record of income.
So it might be that you can’t necessarily use all the income you’re expected to receive in that first year of being a partner. But if you’re looking to stretch your borrowing, it might be ideal to wait a little longer. For example, if you’ve gone from associate partner and now you’re expecting to double your income, it could be better to build up a track record to prove you’re likely to receive that.
If you are newly made up, they’ll generally only look at the minimum drawing. They won’t look at your anticipated share of partnership profits. Once you’ve had your first year, we could see what the minimum drawing is and what you’ve been awarded as your share of the partnership’s profits.
There’s the potential for that to increase the level of borrowing. So you don’t need to be a partner more than a day necessarily, but the income figure used will vary depending on the setup and your agreement with the firm.
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Can I factor in annual bonuses for a mortgage?
You could, yes. Generally, lenders want a bit of a track record, and two years is a typical timespan. The lenders have a responsibility to make sure that the mortgage is going to be affordable for the full term of 20, 30 years or more.
So they want to see that the bonuses you’re receiving are likely to be sustainable. Things like sign-on bonuses, for example, lenders won’t typically look at – they’re by their nature one-offs. You won’t receive that every year, so they can’t use that for affordability assessments.
But if you’re getting consistent annual bonuses we could use them. How much of that bonus is used will depend on the lender. Some only take 50% towards their affordability assessment, whereas others will use 100%. Some take an average, and some will use the latest year.
It’s all about looking at things at that point in time and seeing how it could be used.
How much can I borrow for a mortgage as a law partner?
If you’re looking to buy, you want to know what you’ve got to spend – and a big part of that is how much could you borrow. There are two ways lenders look at assessing maximum levels of borrowing. The first is the Loan to Income multiple they apply, and then the second is an affordability assessment.
The Loan to Income is fairly straightforward. They’ll have a maximum cap somewhere between 4.5 and 5.5 times your income. The multiple applied will depend on your income and level of deposit, and again, that changes between lenders.
For the affordability assessment they’ll look at your income and your committed outgoings. You might have repayments on a loan, school fees or childcare costs, in which case they’ll assess what you’ve got coming in, what you’ve got going out and what you have left over each month to pay the mortgage.
Those assessments are the same for anyone. The only difference is the level of income that gets put into those calculations. For a newly made up law partner, there’s generally that minimum drawing we could get confirmed by the firm.
If you’ve been a partner for a bit longer, lenders look at your total profit from partnerships on your tax calculations over two years. That will include your minimum regular drawings plus any share of the partnership profits and bonuses.
Some lenders on the self-employed side will only look at the most recent year. Even if it has gone up significantly, as long as there’s justification that it’s likely to be sustainable, that could be a useful way to stretch your borrowing.
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What deposit do I need for a mortgage as a law partner?
At present, there are lenders who accept a 5% deposit, but the lower the deposit, generally, the lower the maximum level of borrowing.
Let’s say, for example, you’ve got 5% deposit. Some lenders might limit your borrowing up to £250,000. If you’ve got a 10% deposit, you could borrow up to £500,000. So to borrow large sums, you need a larger deposit.
At the point of recording in September 2024, there are some pretty generous lenders. Some will go up to £2.5 million with as little as 15% deposit. It all depends on your income being strong enough to support affordability for the loan.
Other factors do come into it. For example, if you wanted to do part of the loan on interest only, lenders generally have larger deposit requirements there. Often they require 25% as a minimum, though some will go as low as 15%.
We also do a lot of offset mortgages for law partners. If you’re paid gross of tax, you’re going to have a lot of money sitting around, waiting to pay a tax bill. You could put that money into an offset account and reduce the mortgage interest each month. Plus, you’ve got the funds there to pay the tax bill when it comes in.
Not every lender allows offset mortgages with 10% or 15% deposit. Some want a larger deposit for those features.
So the deposit you need depends on how much you’re looking to borrow, and the terms that you want to set it up on – it all comes down to individual circumstances.
Why are interest-only mortgages popular for law and equity partners?
Firstly, if you’re a lawyer, you generally have a pretty clear career path. The longer you’re in the firm, the more you’re going to earn – so if you’re looking to buy something now, you might be stretching the budget to avoid further house moves down the line.
Every time you move, it costs you money in stamp duty and agent fees etc. If you’re going to be earning a lot more in years to come, you might decide that it’s better to avoid any stress about high monthly mortgage payments now, and set the loan up on an interest only basis to reduce the cost. You could then pay down the loan in years to come when your income is higher.
It ties in with costs, as well. A lot of people we deal with have young children with childcare fees or school fees, which are fairly hefty. But they could see that at some point in the future, those costs are going to disappear and simultaneously they’re earning more money.
So it makes sense to pay off more of their mortgage at that time, and reduce the financial pressure now. That’s one reason why interest-only mortgages are quite popular.
They also work nicely with the offset features we mentioned. If you have an offset mortgage on an interest only basis, any funds you put into the offset account directly reduce the monthly payments. As an extreme example, if you had a £1 million loan, with £1 million cash in the offset account and you’re on an interest only mortgage, you’re not going to be charged anything at all month to month.
You have essentially that big facility there in the bank that you could use at any point without any interest being payable. So again, if you’re putting money aside to pay a tax bill, it’s very useful.
The same goes if you’ve got other projects on the go. Say, for example, you’re looking to buy or build a second home, you could leverage finance on your main residence and essentially have no monthly outgoing. It’s a very useful feature to have.
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How do I get a better mortgage as an equity partner?
A lot of the high street banks are not necessarily the right place to go if you’re a newly made up partner, or indeed an equity partner.
Being a legal partner is not massively complicated, but some banks and brokers are just not familiar with it. So I would say it’s important to speak to a broker that recognises the process, who knows how your income is likely to be structured and how that could be presented to a lender.
There are different ways income could be treated by lenders. Someone who’s got a handle on both sides of that could make sure you’re looked after and that the mortgage is the most appropriate for you.
If you’re dealing with someone who’s familiar with law partners, there are a lot of good options available to you. So make sure you deal with someone that knows what they’re talking about, basically.
PLEASE NOTE: YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
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