Salary sacrifice schemes are an employee benefit that many people like to take advantage of, and it can drive a number of different lifestyle improvements, including the leasing of an electric vehicle, as well as offering tax advantages. However, participating in such a scheme does have to be balanced against other important life decisions, as there can be implications or adjustments you need to make to your financial calculations. Therefore, having clarity and a full understanding of how salary sacrifice can impact on some financial decisions is very important, and one of these key considerations is with a mortgage application.

Can salary sacrifice affect a mortgage application?

The short answer is yes, as your gross income is reduced but this depends on the lender’s policy when it comes to salary sacrifice schemes. As Salary sacrifice is where you agree to reduce your gross salary by a specific amount, in exchange for a benefit. Popular benefits include leasing an electric vehicle through a scheme like the one provided by Pink Salary Exchange, but can also include extra pension contributions, healthcare schemes or childcare vouchers. The key factor is that the amount taken off your salary significantly reduces your taxable income, and reduces the amount of national insurance you pay. A mortgage lender assesses your ability to repay a loan based on your salary and therefore what is affordable to you, and of course, salary sacrifice is reducing your gross income and therefore may affect your borrowing capacity, so the amount a lender might be prepared to lend you depends on their attitude to salary sacrifice, as not all of them view such schemes in the same way.

How lenders consider salary sacrifice schemes alongside mortgage applications

When you are applying for a mortgage, most lenders will base their affordability calculations on your gross salary, so this is your total salary before any tax, national insurance or salary sacrifice deductions. This essentially recognises that a salary sacrifice scheme is voluntary, the amount taken from your salary is adjustable, and you may choose to opt out of a salary sacrifice scheme after a few years. On this basis, a mortgage lender who bases their calculations on gross salary will typically offer to lend you a larger amount. However, some lenders are more cautious and will base their decisions on your nett pay, ie. the amount of money you receive on your payslip after all deductions. Naturally, this will limit how much they might be prepared to lend you.

Your borrowing capacity will be influenced by whether a mortgage lender considers your gross salary or your nett salary for their repayment calculations. Also, if you participate in a salary sacrifice scheme your gross salary will be lower, and this could affect how much a lender is prepared to let you borrow.

How can I positively impact my mortgage application if I participate in a salary sacrifice scheme?

Salary sacrifice schemes are considered differently by different financial institutions. Some base lending decisions on your gross salary, others on your nett salary, or post-sacrifice salary.

• Clarity – The first thing you should do is be transparent and provide clarity when making your application. Most people use a financial advisor or a mortgage broker to help them find the best deals, make it clear to them that you are participating in a salary sacrifice scheme and they will be able to scan the market for the best deals with this knowledge. When you actually apply for a mortgage you should also clearly communicate your salary sacrifice arrangements to your potential lender. This form of clarity should also involve providing payslips and evidence of all your deductions. This is an essential part of the process and ensures the lender is using accurate information upon which to calculate the affordability of your application. At this stage, the lender will make it clear whether they are basing their calculations on your gross or nett salary.
• Options – Research the market and find a lender that best suits your financial circumstances. Some lenders are flexible in how they carry out their calculations in terms of salary sacrifice, but you should explore your options and secure a number of different offers to find the most appealing one.

Professional advice on salary sacrifice schemes

In conclusion, there are many benefits to salary sacrifice schemes in terms of lifestyle and finances, but you need to balance these against the impact of longer term decisions. One of these is a mortgage application. Salary sacrifice does result in a lower gross salary which in turn can reduce the amount a lender is prepared to offer you.

If you plan ahead and get professional advice on how a mortgage application can be affected by salary sacrifice, this can help you make good, informed decisions. This advice can include finding mortgage lenders who are willing to provide a more favourable mortgage offer, based on your salary sacrifice status, ie. they will base their calculations on your gross salary and will appreciate that salary sacrifice provides you with a better overall financial position.