Car salary sacrifice schemes are an attractive way for employees to acquire a new electric vehicle and enjoy tax savings. However, while the immediate financial benefits can seem compelling, the decision of whether to join an EV salary sacrifice scheme should never be made in isolation of how it could impact other areas of your finances. In particular, consideration should be given to its potential repercussions on your ability to get a mortgage or the ability to meet your existing mortgage repayments.
“When considering salary sacrifice for any purpose, including the purchase of an electric vehicle, it’s important to get a clear understanding of the implications of the scheme as well as the benefits it may bring,” says David Hollingworth, mortgage expert at L&C Mortgages. “Reducing the outlay on the vehicle is clearly a big benefit but it will also mean that you will be incurring an ongoing commitment, just like with a loan or other car finance arrangement.”
Let’s explore how salary sacrifice could ultimately impact your current mortage or home ownership aspirations.
Does Salary Sacrifice Affect Getting a Mortgage?
Being in a salary sacrifice scheme could impact your ability to get a mortgage by reducing your borrowing power.
Mortgage lenders will consider your income as one of the primary factors in determining how much money they are willing to lend you. By reducing your take-home salary a salary sacrifice scheme may mean that you are eligible for a smaller mortgage and have to make a larger deposit to meet the lender’s requirements.
Mortgage Affordability Considerations
It is important to recognise that mortgage lenders assess various factors when determining lending capacity rather than applying a one-size fits all income multiple. While your income levels are important, lenders also consider the borrower’s financial commitments and expenditure to assess their affordability. “That will help them to build a more individual picture around what will be affordable, and lender affordability calculators could therefore offer a different borrowing level based on how much disposable income there is,” says David Hollingworth.
Discretionary Deductions vs Fixed Financial Commitments
Mortgage lenders will consider the cost of car finance as well as other financial deductions such as pension contributions and student loans when calculating mortgage affordability. Some deductions like voluntary pension contributions through a salary sacrifice scheme may be viewed more leniently as they are considered more discretionary and could easily be stopped or reduced if the borrower needed to find extra money for their mortgage repayments. By contrast, commitments under an EV salary sacrifice scheme are usually fixed for a number of years, so will impact borrowing capacity in the eyes of a mortgage lender. “A lease will be a commitment for a specified period of time so will be factored in and have a potential impact on the amount that could be borrowed,” says David Hollingworth.
Individual Lender Affordability Criteria
It is important to note that different mortgage lenders will have their own affordability criteria. While some may be more flexible regarding commitments like salary sacrifice schemes, others may take a more cautious approach, especially if you are looking for a high loan-to-value mortgage, for example, anything over 80%.
“It’s therefore really important to shop around to ensure that you pinpoint the right lender for your overall personal circumstances,” suggests David Hollingworth. “Just because one lender may not offer the desired level of borrowing doesn’t mean that another couldn’t be more flexible.”
The Benefits of Salary Sacrifice for Mortgage Applicants
While lenders will inevitably take an EV salary sacrifice scheme into account when you apply for a mortgage, being part of such a scheme may actually improve some aspects of your finances when your mortgage affordability is being assessed.
An EV salary sacrifice scheme can provide you with access to a vehicle at a more affordable price than other car finance alternatives, reduce your monthly fuel costs, and if extras such as electric car insurance, maintenance, servicing and breakdown cover are included, could even mean some of the outgoings typically associated with running a car disappear entirely.
Does an EV Salary Sacrifice Affect Your Credit Score?
Your credit score plays a pivotal role in your ability to secure a mortgage. One common concern is whether participating in an EV salary sacrifice scheme could negatively impact your credit score.
Salary sacrifice schemes themselves do not directly affect your credit score as you are leasing the vehicle through your employer. As these schemes are essentially voluntary arrangements between you and your employer there is no credit check and no impact on your credit rating.
However, if the reduced income created by being in a salary sacrifice scheme affects your ability to meet existing financial commitments or makes it challenging to repay debts promptly, it could indirectly lead to credit score issues. A lower credit score could hinder your ability to be approved for a mortgage or remortgage in the future.
Could Salary Sacrifice Affect My Mortgage Payments?
Joining a salary sacrifice scheme could have a financial impact on your mortgage if you are already a homeowner. As a salary sacrifice scheme will reduce your monthly take-home pay, this could affect your ability to meet your existing mortgage repayments, particularly if your finances are already stretched.
If you are thinking about joining an EV salary sacrifice scheme make sure that you fully understand how a salary sacrifice scheme works, calculate the reduction in your salary that this would entail and work out whether it is sufficient to allow you to meet your ongoing mortgage payments and any other financial commitments such as loans. If you are on a variable-rate mortgage or approaching the end of a fixed-rate mortgage you should be mindful that your mortgage payments may be higher in the future.
How to Mitigate the Impact of Salary Sacrifice on Your Mortgage
If you’re considering participating in an Electric Vehicle Salary Sacrifice scheme and want to safeguard your mortgage prospects, there are several proactive steps you can take:
- Seek expert financial advice
Consult with a financial adviser or mortgage broker who can provide tailored guidance based on your individual circumstances and help you navigate the complexities of mortgage applications. “As well as taking advice be sure to read around the way the scheme works and understand the level of commitment and knock-on impact,” says David Hollingworth. “That should help avoid any unforeseen consequences such as finding mortgage options become more limited in the future.”
- Be transparent
Keep open lines of communication with your mortgage broker and mortgage lender. Clearly explain the terms of your salary sacrifice and how it may impact your income. Providing comprehensive documentation regarding your salary, including details of the sacrifice arrangement, can help lenders assess your financial situation more accurately.
- Explore lender policies
Different mortgage lenders have varying policies regarding salary sacrifice. Some may consider gross income, while others focus on net income. Understanding these policies can guide you in choosing the right lender for your circumstances.
- Plan ahead
If possible, consider delaying your salary sacrifice arrangement if you are planning to apply for a mortgage or remortgaging in the near future. This will enable you to maximize your income and potentially enhance your borrowing power.
The Final Word on How an EV Salary Sacrifice Scheme Could Affect a Mortgage
In conclusion, salary sacrifice can influence the likelihood of a successful mortgage application. If your salary sacrifice significantly reduces your take-home pay, it may affect the mortgage amount you’re eligible for and require you to make adjustments to meet lender requirements.
However, while lenders will evaluate an applicant’s income, they will consider this as part of their overall mortgage affordability assessment, reviewing your entire financial position. In most cases, an EV salary sacrifice is unlikely to be a decisive factor in a mortgage application.
If you already have a mortgage, be conscious of how your reduced earnings through salary sacrifice could influence your ability to meet your monthly mortgage obligation and impact your overall financial stability.
This article is not financial advice. The impact of an Electric Vehicle Salary Sacrifice Scheme on your mortgage or mortgage eligibility can vary based on individual circumstances. It is advisable to consult a financial adviser or mortgage broker for personalised guidance.
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Richard Eagling is a financially qualified journalist with over 25 years of experience in financial reporting.
With over two decades at Moneyfacts as the editor of Investment Life & Pensions Moneyfacts, he was most recently Managing Editor at NerdWallet UK.
Richard’s a regular media contributor, his expertise has been published in The Guardian, Daily Mail, Sky News, Financial Times and The Telegraph.