While salary sacrificing into our super contributions is pretty standard, did you know that you can also sacrifice your salary into your mortgage repayments? Repaying your home loan faster and reducing taxable income salary sacrificing is a good idea for many Australians. It can help those who struggle to save money for regular repayments. But, is it right for you?
This guide will unpack what salary sacrificing is, the pros and cons, and how to salary sacrifice your mortgage.
How does salary sacrificing work?
Salary sacrificing, also called salary packaging, is an arrangement where the employee’s income is split between cash payments each month and other benefits. Rather than receiving the entire salary as a monthly income, the employee pays a percentage of it to your pension, home loan repayments, and other expenses.
Depending on the employer, a salary sacrifice arrangement might pay towards many things. Essentially, the aim of salary sacrificing your mortgage repayments and other non-cash benefits is to reduce your taxable income.
Some benefits might be subject to the Fringe Benefits Tax (FBT). This is a payment employers pay for additional benefits to their employees. Some sectors have FBT exemptions or rebates and might provide salary packaged benefits more cost-effectively than other employees. These industries include hospitals, charities, and other non-profits.
Your after-tax salary depends on the type of benefits paid by the employer and whether it’s liable to FBT. Accordingly, this determines whether salary sacrifice is worthwhile and cost-effective for you or your employer.
What are the rules?
Mortgage payments are typically a fully taxable fringe benefit. Therefore, salary sacrificing is not always in your employers’ best interests. Paying the total amount in FBT is not necessarily cost-effective. However, if you work for a not for profit organisation, there may be a financial advantage in a salary sacrifice arrangement.
Employers who are FBT exempt can offer non-cash benefits to employees without FBT, up to the following limits:
- $17,000 for each employee of a hospital or ambulance service
- $30,000 for each employee of a health promotion charity or a non-hospital Public Benevolent Institution
- $30,000 for employees of other not for profit industries, registered charities, some educational organisations, trade unions, and employer associations. They are only allowed a rebate of 47% FBT.
For the most part, benefits for employees of other industries must pay the total FBT amount. Therefore, it’s probably not cost-effective for the employer. However, other professions get perks on their home loans.
Let’s say that Kayla has a base salary of $100,000 per year. Her employer pays $15,899 per year in mortgage repayments, less than the capped limit of $30,000. Her take-home pre-tax income is $84,101. Therefore, she pays $20,562 in income tax. Comparatively, she owes $26,497 in tax without the salary sacrifice arrangement.
A saving of $5,935 is worth it to Kayla. However, if her employer had to pay FBT, they would lose $14,100. If Kayla works for a not for profit organisation, it is a cost-effective arrangement. However, if she does not work for an FBT exempt company, it is not worth it for the employer.
What are the other types of salary packaging?
As we mentioned, home loan repayments aren’t the only thing employers pay as a non-cash salary package. The other prominent kinds of salary sacrifice arrangements include
- Super contributions: You and your employer might agree to pay part of your salary into your superannuation. This is the most prevalent type of salary sacrificing agreement. Some lenders consider this a voluntary contribution and add it back to your income when assessing your loan eligibility.
- Novated lease: Some employers agree to pay for the cost of leasing and running a car or other vehicle from your pre-tax income.
- Rent: Your employer might pay your rent out of your pre-tax salary. However, some lenders don’t like this as they assume that when you buy a house, the rent will cease, as will your benefits.
- Electrical goods: Phones, laptops, and other minor electrical books are often included in salary sacrificing packages.
- Bikes: Some employers offer a cycle to work scheme and pay for your bike out of your pre-tax salary.
Salary sacrificing your home loan is one of the smartest ways to lower your tax bill. The employer will directly pay the lender, and you won’t see any money.
The First Home Super Saver Scheme
If you’re a first-time buyer, you might be eligible for the First Home Super Saver Scheme. This scheme enables first-time buyers to sacrifice their salaries as a deposit for a home loan. The contributions are limited at $30,000, with a cap of $15,000 a year. Plus, the contributions are only taxed at 15%.
What are the benefits of salary sacrificing your mortgage?
While salary sacrifice mortgage arrangements aren’t for everyone, it has their benefits. Part of your pre-tax salary will go directly to the lender. While it might seem that you’re earning less income, you’ll pay less tax every year.
Moreover, if you’re already planning to buy a house, the money for your mortgage would be leaving your account anyway. With a salary package, you lower your income tax. As the mortgage repayments leave your income before paying tax, your yearly take-home salary is lower.
Say you earned $50,000. Without the salary sacrifice mortgage, you would pay $6,717 in tax. Whereas, with mortgage repayments of $10,000 per year, you only pay $4,142 tax. In the first scenario, you end up with $43,283 leftover. In the second, you have $35,858 – but you also have a house.
Therefore, you can spend these savings on other expenses. Accordingly, you will be able to pay off your loan faster and reduce your interest payments over the loan’s lifetime.
Furthermore, as the loan repayments are sent directly to your lender, you don’t need to worry about the hassle and stress of organising your monthly repayments.
What are the drawbacks of salary sacrificing your mortgage?
On the other hand, salary sacrificing your home loan is not for everyone. There are downsides to the arrangement. Once you have agreed to the scheme, you won’t be able to access the sacrificed wage – it will be automatically deducted from your pre-tax income and paid to your lender.
That said, if you’re worried about a cash flow shortage, tying your money up in property may not be the best plan for you.
Moreover, if you have a superannuation salary sacrifice plan in place, arranging a mortgage agreement will reduce your pension payments. This could impact your retirement savings. Similarly, other benefits you receive from your employer might change—for example, any holiday loading or overtime.
To get the best outcome, you may need to negotiate with your employer.
Traps to avoid
Make sure you know what traps you should avoid ahead of entering into a salary sacrificing agreement:
- Employer refusal – your employer may not think it is in their best interest. It might be too time-consuming and costly for them to think it worthwhile. Therefore, it’s up to you to convince them. But, be aware that they may still say no.
- Employer limits – some employers might limit the amount of pre-tax income you can sacrifice towards your home loan repayments. Speak to your employer about what they’re willing to offer you.
- Less super contributions – as mentioned, with more money going towards your home loan, the less you’ll pay into your superannuation.
- Less disposable income – if you need more cash flow, then salary sacrificing might not be the right decision for you.
- Fees – some employers might charge an administrative fee.
What are technical arrears and how do I avoid them?
The issue of handing over your mortgage repayments to your employer is that you can’t be 100% sure it’s set up correctly. If your mortgage isn’t set up properly, your lender may contact you. This is because banks receive interest payments on a specific date. If your employer’s paydays differ from this, then you may be in technical arrears.
Plus, as your repayments vary from month to month with fluctuating interest rates, you may need to change what your employer pays into your mortgage. This is only the case with a variable rate home loan. Fixed-rate mortgage repayments stay the same every month.
However, some home loans are designed specifically for salary sacrificing. They provide greater payment flexibility. You can align your repayment dates and allow an automatic direct debit to take any shortfall from your regular account.
With a salary sacrifice mortgage, the payments are automatic. You won’t need to organise a thing. Seek professional advice from a specialized mortgage broker to find the perfect home loan to suit you and your employer.
How to save tax in a salary sacrifice agreement
While it’s not a well-known strategy, a mortgage salary sacrifice agreement might save you vast amounts of money. This is especially the case if you’re in an industry that doesn’t charge tax on employee benefits.
As we saw with our earlier example, savings could be a few thousand. However, your tax savings will be even higher if you’re in the maximum tax bracket. If you earn $185,000 a year, you’re usually taxed 45%. However, if you salary sacrifice $20,000 a year, you lower yourself into the next tax bracket.
Therefore, rather than paying $53,917 in tax, you would pay $46,117. Speak to your employer about whether your tax savings are worth mortgage salary sacrificing.
Does salary sacrificing impact your home loan application?
One important thing to note is whether salary sacrificing for a car, pension, school fees, or other purchases can affect your home loan application. Mainly the amount of money you can borrow. Some lenders might count your salary sacrifice as an expense rather than part of your income.
Say you have $5,000 of your pre-tax salary going towards your salary sacrificing arrangement, then they will reduce your income by that amount. To work out your borrowing power, use our calculator. Lenders also consider other factors, such as your credit score and deposit amount.
However, not all lenders view a sacrificed salary as an expense. If they view it as a voluntary payment, you might have a greater borrowing power. This is why you should seek the help of a mortgage broker to ensure you find the best lender for your situation.
Whether or not they view it as a voluntary payment depends on where the money is going. For example, if you’re salary sacrificing to car payments, it’s an expense. You cannot stop paying your car loan repayments. On the other hand, if you’re making extra contributions to your super, this is voluntary. You have no continued obligation to pay into your super.
Which banks accept home loan salary sacrifice?
You will need to talk to your lender about whether or not they offer salary sacrifice mortgages. If they do not, you may have to speak to a broker to find a lender that suits your situation. As with any loan, ensure you shop around to find the best deal. Look at the comparison and interest rate and loan term.
How to Check if You Can Salary Sacrifice Your Home Loan
Follow these steps to determine if you can salary sacrifice your home loan
- Speak to your employer about whether they will let your salary sacrifice your home loan repayments. You may need to negotiate how much they’re ready to let you sacrifice. If you’re salary sacrificing other expense payments, such as superannuation, check how your mortgage payments will affect it.
- Ask your accountant for their advice. You need to determine the best way to pay less income tax – the additional fees that sometimes come with salary sacrificing mortgage payments might not be in your best interest.
- Speak to a mortgage broker about which lenders they recommend for your financial situation.
How can a mortgage broker help?
Mortgage brokers have many years of experience in the industry. With their help, you can compare home loans without any mortgage stress. Find a Sydney broker specialising in salary sacrifice mortgages to help you search.
Is salary sacrificing your mortgage repayments sensible?
Whether or not you choose to salary sacrifice your mortgage payments depends on your employer, tax bracket, and financial needs. If you’re receiving other salary-related benefits, it might not be cost-effective to arrange salary sacrifice repayments on your home loan too.
Ensure you speak to your employer, accountant, and broker to determine the best course of action.
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Can you salary sacrifice mortgage interest and principal?
When you salary sacrifice, your employer will repay your mortgage interest and principal from your pre-tax salary. Salary sacrificing your mortgage reduces your taxable income and might help you pay off your loan sooner.
How does salary sacrifice impact mortgage?
If you’re sacrificing salary for other payments, such as a car loan, the lender will see this as an expense. Therefore, your borrowing power will reduce. However, if you’re paying into a super, this is a voluntary payment and does not impact your borrowing capacity.
What payments can be salary sacrificed?
Depending on your employer, you can salary sacrifice many different payments. These could include mortgage repayment, superannuation contributions, cycle to work, car lease, phones or computers, and school fees.
What are the disadvantages of salary sacrifice?
The most significant disadvantage of salary sacrifice is the loss of flexibility. As the mortgage payments are sent directly to the lender before you receive your income, you lose any ability to control your finances yourself. This might suit some people who would like someone else to handle the responsibility and hassle.
Does salary sacrifice affect tax return?
Yes, your total taxable income is reduced when you pay for your mortgage out of your pre-tax salary. Therefore, you’ll pay less tax while still being able to purchase a house.
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