Salary sacrificing can be a cost-effective way of paying off your home loan, but there are limits on who can avail of this benefit and how much they can access. Your Mortgage answers five of the most common questions people have about salary sacrificing their mortgage.
How does salary sacrificing work?
Salary sacrificing, also referred to by the Australian Taxation Office (ATO) as salary packaging or total remuneration packaging, is an arrangement between you and your employer that allows you to use part of your pre-tax salary to pay for certain expenses. These expenses may include your super contributions, mortgage repayments, car loans, childcare spending, and health insurance.
Using your pre-tax salary to cover for these expenses will enable you to minimise your taxable income because as far as the ATO is concerned, you are earning less. This means you will also be paying less taxes. However, your employer may be required to pay fringe benefits tax (FBT), which is often paid for the benefits their employees receive. This is the reason why you need your employer’s approval for this kind of arrangement. Some sectors – including public and private hospitals, not-for-profit organisations, and charitable institutions – are entitled to an FBT exemption or rebate, making salary packaged benefits more cost-effective to implement.
If you are a first home buyer, you can also sacrifice part of your salary into your superannuation that you can use as a home deposit through the First Home Super Saver Scheme. Under this scheme, you can make contributions to your super not exceeding $15,000 per financial year and $30,000 overall. Super contributions not covered by this scheme, however, cannot be withdrawn and used to pay for your home.
What are the benefits of salary sacrificing your mortgage?
When you enter a salary sacrificing agreement for your mortgage with your employer, part of your pre-tax income will be paid straight to your lender. This will seem that you are earning less income, which means you also will be paying less income tax every year.
The money you can save can be spent on other expenses or you can use it to make extra mortgage repayments, allowing you to pay off your loan faster and reduce the amount of your interest payments over the life of the mortgage.
And because loan repayments are sent directly to your lender, you do not need to personally undergo the monthly repayment process, minimising stress and freeing up time for other important activities.
What are the drawbacks of salary sacrificing your mortgage?
However, salary sacrificing your home loan also has potential pitfalls. Once an agreement is in place, you will no longer have access to your sacrificed wage as it will be automatically deducted from your pre-tax salary and paid directly to your lender.
Salary sacrificing also reduces the amount of superannuation your employer is required to pay, so it is advisable that you evaluate the potential impact of the agreement on your retirement savings. Your salary-related benefits may likewise change, including holiday loading and overtime, as you will be earning less income. You will need to talk and negotiate with your employer if you want these benefits protected.
Does salary sacrificing impact your home loan application?
Salary sacrifices can affect how much you can borrow, according to Desiree Pasic, finance broker at Bee Financial Savvy.
“If you are applying for a home loan, lenders may count your salary sacrifices as an expense,” she said in an explainer video. “This can significantly reduce how much they will let you borrow.”
Pasic noted, however, that this depends on whether the lender views your sacrificed salary as voluntary.
“For example, if you are using salary sacrificing to pay car payments, you can’t just stop paying this. A lender will consider this to be an expense,” she said. “But what if you have chosen to use your pre-tax salary to make extra contributions to your super? Can you stop these payments at any time? Then they will be considered voluntary. They won’t be counted as an expense and won’t affect your borrowing capacity.”
Is salary sacrificing your mortgage repayments a good idea?
Not all companies allow salary sacrificing and for those that do, they may have different policies. If you plan on sacrificing your salary for your mortgage, it is best to check with your human resources department to see what options you have and with the ATO to ensure that you are eligible for the benefit.
If you employer agrees to this arrangement, it should be put into a formal contract. This should include the terms of the salary sacrifice, the amount, and the details on how the mortgage repayments will be made.
Another important thing to note is that this option is often accessible only if you are buying an owner-occupier home and not an investment property. Some banks also do not accept salary sacrifice repayments, so it is best to check if your lender allows this arrangement. Your accountant and mortgage broker can help you work out how much you can save by salary sacrificing your loan repayments and if the move is worth it in the long run.