Does salary sacrifice affect mortgage applications?


MoneyPlus Features Team

16th June 2015 at 8:51am

If you plan to buy a new home or remortgage to get a better deal, you’re likely to find it’s a lot harder to get a mortgage than it used to be.

It’s due to new affordability rules brought in last year to ensure people can afford their repayments and cope with any significant rate rises. Mortgage lenders don’t just take your salary or income into account when deciding how much they’re willing to lend you; they scrutinise your take-home pay and expenditure.

What many people want to know is whether their regular pension contributions affect how much a lender might be willing to offer them.

Mortgage lenders take different approaches

The answer isn’t clear cut. The reality is different lenders take their own approach and some apply the affordability criteria more tightly than others. When it comes to expenditure, loans, debts, travel and regular bills, entertaining and gym membership are all taken into account – and if you pay pension contributions by salary sacrifice through your employer, some take the view that you’ll have a lower income available for mortgage repayments.

One recent article in The Guardian highlighted how one would-be buyer was granted a mortgage “in principle”, only to see their application fail the affordability rules, they believe, because of their 6% pension contributions. It’s certainly worth a read.

Remortgaging cutting monthly payments

Then there are puzzling examples of those wanting to remortgage and stay in their own home being told they can’t afford it, even though remortgaging would cut their monthly repayments. It’s a growing issue right now because of the number people having to remortgage as their interest-only mortgages – common in the 1980s through to the early noughties – come to an end.

Should this put you in a dilemma over saving into your pension if you’re planning to take out a mortgage?

Steve Webb, the former pensions minister, has commented that “nobody should be encouraged to stop paying into a pension scheme in order to secure a mortgage”. He also said that lenders should use their judgement and not consider pension contributions as “committed” expenditure. Pension payments can, after all, be flexible, increasing, or reducing, as your circumstances change.

Steve Webb, the former pensions minister, has commented that “nobody should be encouraged to stop paying into a pension scheme in order to secure a mortgage”

But as that doesn’t appear to be the case with some lenders, what can you do?

Go and see a mortgage adviser as opposed to going direct to a lender. They know which lenders are best suited to individual circumstances, what they are likely to take into account, including your pension contributions.

They’ll also be able to go through your finances and advise you what to do to give your mortgage application the best chance of succeeding. That could include suggesting practical ways to cut back on gym membership, satellite TV packages or the amount you spend eating out, while continuing to make your pension contributions.

Build for your future

After all, you may need a mortgage to be able to buy the home you want but it’s just as important to keep on saving for your retirement, whatever you want that to look like. Saving more, for longer, will give you more choices when you retire – and that’s a future well worth building towards.

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The information in this blog or any response to comments should not be regarded as financial advice. A personal pension is an investment. Its value can go up or down and may be worth less than you paid in. Laws and tax rules may change in the future. The information here is based on our understanding in June 2015.