How to read a pay slip: common headaches for mortgage brokers

June 19th, 2017

Checking a customer’s pay slip sounds simple, but no two payslips are the same. And whilst payslips are key to verifying income and therefore, getting your clients into their home, payslips are often hard to read and poorly understood. In this article we look at the most common headaches mortgage brokers face when reading a pay slip, and how you can overcome them.

Common headache number 1: Deductions

One of the most common headaches is identifying automatic deductions that are made from your client’s income. These can include novated leases, additional super repayments or a HECs / HELP debt. The key here is to understand and really drill down into your client’s gross income, and then net income (minus tax, deductions etc).

Common headache number 2: If annual leave is showing

In some instances, a payslip won’t display leave entitlements – including annual leave, personal leave and long service leave – even though your clients work full time or have a permanent part-time position. It is important to check this as some lenders will see no leave entitlements, and think they are casual employees. If that is the case, most lenders will then require an employment letter confirming that your clients are in fact employed permanently and/or an ATO notice to confirm. These take time and hold up the process, so it’s easier just to check this up front.

Common headache number 3: Allowances and overtime

Locating overtime payments on a payslip is usually quite simple, however lenders often don’t consider overtime income when they assess a home loan. It all comes down to consistency. In addition to the payslips, lenders will usually ask for either a group certificate, YTD income figure or 3 month’s payslips as evidence. Getting these documents up front can save you a lot of headaches!

Common headache number 4: Salary packaging

Salary packaging or salary sacrificing in Australia reduces your taxable income and therefore reduces the amount of income tax you pay. Say, for example, a client is on $100,000 a year and then elects to salary sacrifice $15,000 a year into her super fund. This means your client will have a taxable income of $85,000 per year. The extra amount sacrificed into super will appear on your client’s annual payment summary as reportable employer super contributions. So what amount does the lender look at to verify the income?

Ah ha, it’s a trick question! They simply look at the gross income (the $100,000 in this example). The salary sacrificing just helps your clients pay less tax, they still earn the same amount of money! (It’s worth noting that some lenders may treat the salary sacrifice as a discretionary spend and may require the customer to reduce or cease this if servicing is tight).

Common headache number 5: Casual, temporary and contract employees

In this instance, the challenge is not reading the payslip, it is verifying the length of time your client has worked for that company or in that role. You may need to delve into their employment history and verify their employment in a little more detail, as that is what all lenders will do when they see a casual, temporary or contract employee application hitting their desk. Here it is about understanding the minimum hours your client works, and the tenure of their position.

Common headache number 6: No pay slips!

Some people don’t get issued with payslips by their employer! It’s actually required by law for an employer to give payslips but some smaller businesses simply don’t bother. In this situation you must always find another way to verify your client’s employment, and you will also need to consider another method of proving their income.

How else can you verify income?

If you are unsure about how much income your client receives, you can also ask to look at their bank statements to confirm the regular net salary they are receiving. Other options are a letter from the employer, or the client’s tax return, or an ATO Notice of Assessment.

We hope this article has shed some light on reading payslips, and relieves some of your common headaches in the future! For more assistance, click your Help icon in Mercury and get in touch with your local Compliance Support Manager. They’ll be happy to help.