FTB - Mortgage Q's

Money_Saving_Monkey_2

Hi guys,

I'm finally in a position where I can consider buying a house. I've been having a look to see how much I could potentially borrow, but I've got a couple of questions that I'm hoping someone will be able to answer for me!

1) I became eligible to join my employers pension scheme at the end of last year, so I'm now paying pension contributions via salary sacrifice. Would lenders normally use my pre salary sacrifice salary when working out how much to lend or would they be using the post salary sacrifice amount?

2) I've got just over £2,000 left to pay off on my student loan. Should I be entering my monthly SLC payments into the mortgage calculators, or are student loans something that lenders tend to ignore?

kingstreet

Are you sure you mean salary sacrifice? This is a technical term for something quite unusual. Do you mean your contributions are deducted from your salary before you are paid each month?

Lenders using income multiples don't expect pension contributions to be deducted first. They use gross annual salary. For those using affordability calculators you should add back in your pension contribution to make your net monthly income higher. This is because lender systems make allowances for different expenses and you could end up being charged a deduction for the same thing twice.

To be on the safe side, I would add the monthly cost of the student loan into the calculator as it represents an expense which won't apply to everyone. Doing this will ensure you don't overextend yourself. Exclude if less than 12 months to run.

Money_Saving_Monkey_2

Hi kingstreet, thanks for the reply - pretty much confirms what I was expecting

I've just checked the details of the pension scheme and it definitely refers to it as salary sacrifice, which operates as you mentioned in your post.

kingstreet

OK. If it definitely is salary sacrifice, this is how it works;-

http://www.pensionsadvisoryservice.org.uk/personal-and-stakeholder-pensions/group-stakeholder-pension-schemes/salary-sacrifice

How It Works

You sacrifice part of your salary. The amount you sacrifice is paid to your pension plan directly by your employer, rather than being paid to you.

As a result of you having a lower salary, both you and your employer pay less National Insurance Contribution (NIC). As part of the salary sacrifice deal, your employer pays all or part of their NIC saving to your pension plan along with the sacrificed amount.

For example, you earn £30,000 a year and decide you want to salary sacrifice £1,000. Your new salary is £29,000, with the employer paying £1,000 to your pension plan. You pay less NIC (and in some cases Income Tax) because your salary is lower. Your employer also pays less NICs and pays a percentage of their saving to your pension scheme.

The percentage of NIC saving your employer pays is defined by them as part of their salary sacrifice offer. It could be anything between 0% and 100%.

So this concerns your employer's contributions.

Effectively, this will impact on your mortgage borrowing. This is because your gross salary is reduced, not just your net salary. You've given up some of the salary you would have received.

This isn't the same as paying YOUR contributions from your salary. You may have a salary sacrifice, then on top contribute yourself. It is your contributions I was referring to earlier when I suggested you should add them back in.

You can't add back in the portion of your salary you're sacrificing.