04 Nov 2022

Does Salary Sacrifice Affect Borrowing Capacity?

Borrowing Capacity

Potential borrowers researching the various aspects of home loans may wonder if salary sacrificing affects their borrowing capacity. Yes, salary sacrifice does have the potential to affect a home loan applicant’s borrowing capacity. Salary sacrifice refers to the agreement between an employee and employer allowing the employer to pay the employee less of their salary and allocate the funds subtracted to an account dedicated to certain financial situations defined by the employer. 

There are situations in which an applicant’s salary sacrifice agreement with their employer can affect their borrowing capacity. If a lender classifies the salary sacrifice payments as voluntary expenses, the applicant’s borrowing capacity may not be affected. Alternatively, if a lender classifies the salary sacrifice payments as involuntary expenses, the applicant’s borrowing capacity is at risk of being affected. 

Involuntary expenses refer to expenses like car payments, bills, and mortgage repayments. Voluntary expenses refer to expenses that can be stopped at any time and generally do not affect borrowing power. Additionally, many lenders will count salary sacrifice as an involuntary expense, leading to a miscalculation of an applicant’s borrowing power. 

Before applying for a home loan, an applicant can explore various methods of increasing their potential borrowing power, including the following examples:

  • Making consistent debt repayments
  • Decreasing high credit card limits
  • Closing unnecessary credit cards
  • Improving credit scores and financial history
  • Saving for a larger loan deposit
  • Adding a guarantor to the loan

If you would like to learn more about your borrowing capacity or are ready to apply for a loan, reach out to the professional Mortgage House lending specialists for further assistance.

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