Salary sacrifice can be an effective way to pay off your home loan. However, there are restrictions on who can use this benefit and how much they have access to. Five of the most frequently asked questions about mortgage repayments are addressed by your Mortgage.
What does salary sacrifice look like?
Salary sacrificing, also known as total remuneration package or salary packaging by the Australian Taxation Office, is an agreement between you and you that allows you to use a portion your pre-tax salary for certain expenses. These expenses could include super contributions, mortgage repayments and childcare spending.
You can reduce your taxable income by using your pre-tax salary for these expenses. The ATO considers you earning less. This will mean that you will pay less tax. However, fringe benefits tax (FBT) may be payable by your employer. This is usually paid for benefits 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.
You can sacrifice a portion of your salary to your superannuation for a home deposit. This is possible through the First Home Super Saver Scheme. This scheme allows you to make super contributions not exceeding $15,000 per fiscal year and $30,000 total. However, super contributions not covered under this scheme cannot be withdrawn or used to pay for your house.
What are the benefits to sacrificing your mortgage for salary?
Part of your pretax income will go straight to your lender if your employer enters into a salary-sacrificing agreement for your mortgage. It will look like you’re earning less and will result in you paying less income tax each year.
You can spend the money you save on other expenses, or you can use it for extra mortgage repayments. This will allow you to pay off your mortgage faster and lower your interest payments over its life.
Because loan repayments are sent directly from your lender, you don’t have to go through the monthly repayment process. This reduces stress and allows you to focus on other important activities.
What are the downsides to sacrificing your salary for your mortgage?
But, there are possible pitfalls when you sacrifice your salary to pay off your home loan. Once you have reached an agreement, your salary sacrificed wage will not be available to you. It will automatically be deducted from your pretax salary and paid to your lender.
Salary sacrifice also lowers the superannuation that your employer must pay. It is therefore important to evaluate the impact of the agreement on retirement savings. You may see changes in your salary-related benefits such as overtime and holiday loading, due to the fact that you are earning less. These benefits will be protected, but you need to negotiate with your employer.
Is salary sacrifice a factor in your home loan application
Desiree Pasic, a finance broker at Bee Financial Savvy, says that salary sacrifices can impact how much you can borrow.
“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 said, however, this all depends on whether the lender considers your sacrificed salary 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? Are you able to stop these payments at anytime? They will then be considered voluntary. They won’t be counted as an expense and won’t affect your borrowing capacity.”
Is it a good idea for your mortgage repayments to be sacrificed in salary?
Some companies do not allow salary sacrifice. It is best to consult your HR department to determine what options are available to you and to verify that you are eligible for the benefit.
This arrangement should be formalized if your employer accepts it. This contract should detail the terms and amount of the salary sacrifice as well details regarding how the mortgage repayments are made.
Importantly, this option is only available if you’re buying an owner-occupier property and not an investment property. Many banks do not allow salary sacrifice repayments. It is worth checking with your lender to see if they are open to this arrangement. Your accountant and mortgage broker will be able to help you determine how much money you can save by sacrificing your loan repayments. They can also tell you if it is worth it.