Do you earn overtime?
Overtime and allowances are a mainstay of many workers’ pay packets. Some rely on overtime to turn their pay from a base salary to a living wage. Others use overtime to save a little more, or buy some of life’s little luxuries.
When it comes to applying for a home loan, if you earn overtime and will rely heavily on it to make your repayments, then be prepared for a lot of questions and additional paperwork.
What does a lender look for when calculating your overtime?
The key pieces of information that a lender will look for is that the overtime and allowances are ongoing and will remain at those levels for the foreseeable future.
To do this, some lenders will need to be able to verify that you received the same or similar levels of overtime and allowances during the previous financial year.
For example, if you are a maintenance worker, you may receive a base salary of $90,000, and a part of your employment contract requires you to be on-call in the evenings every 1 in 4 weeks. If you are called out during his time, you will receive overtime rates and allowances. If you aren’t called out, all you receive is a flat rate allowance for being on-call.
So, it’s hard to predict your future income, unlike a standard job, which pays you the same each week.
For example, if you get called out every night when you are on-call for that week. Or you might not get called out at all.
A lender will need to allow for the fluctuation in your salary before they will loan any money for a home.
Some lenders will only accept 80% of your overtime. Say you have earned $1,000 of overtime in a month, then a lender will only accept $800 of this. Other lenders will take 100%.
What additional information do you need to supply?
To determine the amount of overtime that is applicable, lenders will look at your estimated annualised salary based on your year-to-date amount and then subtract your base income. This shows how much extra you have earned and can be expected to earn over the year ahead.
They will then ask to either see your income statement from the last financial year, or your last payslip from the last financial year to determine the level of overtime is consistent.
Some lenders may ask to see a letter of employment or employment contract to see if overtime amounts are part of your ongoing working arrangements (see the on-call example above) and not on an ad-hoc basis.
Lenders will use various methods to account for variations that may occur, and whatever method they use will require just a little more paperwork than for employees with a flat salary.
It is important to note that for employees in essential services, such as health care and emergency services, your overtime is mostly acceptable at 100%. All you will need to provide is your two most recent, consecutive payslips, the latest within 45 days of the application date, with average income taken from the total YTD.
If you have not been earning overtime for more than 12-months, then it may not be acceptable income.
How can I help?
I can review the policies from our panel of over 35 lenders to find you the best mix of borrowing power and interest rates to make sure you are making the most of your overtime and allowances.