Can you salary sacrifice a mortgage?
Published 3:39 am 29 Jan 2021
Salary sacrificing into superannuation is a popular savings strategy in Australia. Less well known but potentially just as effective is the practice of salary sacrificing to your mortgage. Also known as ‘salary packaging’, the strategy involves making an arrangement with your employer under which your pay comprises cash and non-cash benefits, the latter taking the form of mortgage payments.
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A key advantage of this arrangement is that it maximises your after-tax benefits. However, the strategy can also help reduce your overall home loan interest bill. This is because salary sacrificing into your mortgage typically increases the amount of your repayments, reducing the time required to pay off your mortgage. Paying your mortgage from pre-tax dollars also means you will potentially have more disposable income that can be put towards building an investment portfolio or a holiday.
Unfortunately, not every employer will let you salary sacrifice your mortgage. There are also restrictions on the type of properties that qualify for the arrangements, including that they must be for owner-occupier mortgages, not investor loans. It is best to check with your employer or the Australian Tax Office to see if you’re eligible.
Salary sacrifice vs paying off mortgage
Salary sacrificing into a mortgage can potentially benefit both employees and employers. The strategy is tax-effective for the employee as they are paying their mortgage in pre-tax dollars. This ‘benefit’ however, can be subject to fringe benefits tax (FBT), which is a tax employers pay on the benefits provided to their employees. Some employers may be entitled to an exemption or a rebate on this tax, although these exemptions are generally limited to those in the healthcare and not-for-profit sectors. Those that can take advantage of the FBT exemption can then provide these types of salary packaged benefits in a much more cost-effective way than other employers can.
While salary sacrificing a mortgage isn’t a common strategy, it’s worth having a look at the money that can be saved. Let’s consider an employee in the health sector who has a base annual salary of $100,000 and mortgage payments of $15,899 a year. If they choose not to salary sacrifice their mortgage, their after-tax salary is $73,503 and after they pay their mortgage – using their after-tax dollars – their net cash remaining is $57,604 ($73,503 – $15,899).
However, if they decide to salary sacrifice the $15,899 mortgage, then their after-tax salary becomes $63,539. While this after-tax salary is lower than if they didn’t salary sacrifice their mortgage, they have already made their mortgage payments. The net cash position of the employee who has salary sacrificed their mortgage is therefore $5935 higher than if they didn’t salary sacrifice their mortgage ($63,539 – $57,604).
This employee’s employer also benefits as FBT-exempt employers can provide benefits free of FBT to employers up to certain limits if the employee works in a health promotion charity or non-hospital public benevolent institution.
Another popular salary sacrificing strategy is to salary sacrifice into super, and a common question is whether it’s better to salary sacrifice into super or pay off the mortgage. There are a number of online calculators that can help you determine the best strategy here. Some of the factors to consider are the rate on your home loan compared to the return you’re getting from super. It’s also worth remembering that your super is locked up until you retire or reach your preservation age except in particular circumstances.
Salary sacrificing into super does not affect the amount you can borrow for a home loan. This is because salary sacrificing into super is considered by lenders to be voluntary and something you can stop any time.
By determining what your net cash position is after paying off your mortgage using either after-tax dollars or by salary packaging, you can work out what the best strategy is for you.
Professions that can salary sacrifice their mortgage in Australia
It’s important to make sure you are allowed to salary sacrifice your mortgage before you put such a strategy in place. Only certain professions are able to do this so make sure you ask your employer or human resources department if it’s possible. If your employer isn’t in a sector that’s entitled to a FBT exemption, they are probably going to be less likely to allow you to salary sacrifice your mortgage. Generally, the sectors that allow you to do this are public or private hospitals, non-profit organisations or registered charities.
You can also check with the Australian Tax Office to see if you’re eligible to salary sacrifice your mortgage.
It’s also important to remember that the option to salary sacrifice your mortgage is only available on owner-occupier properties, not investment properties and that not all lenders will accept this form of payment for a loan, so if they don’t you may need to do some research to find one that does.
Who can salary sacrifice their mortgage?
Not every employer or industry allows you to salary sacrifice your mortgage. You are generally eligible if you work for a not-for-profit organisation, registered charity, or a public or private hospital. It’s always wise to check with your employer first as well as the Australian Tax Office to see if you’re allowed. If your lender doesn’t accept salary sacrificed payments for your loan, you may want to consider refinancing with another that does.
Does salary sacrifice affect getting a mortgage?
Yes, it can but not always. Lenders may consider your salary sacrifice as an expense and that can reduce the amount they will allow you to borrow. Whether they consider it as an expense comes down to whether your salary sacrifices are voluntary. For example, salary sacrificing to pay for your car loan would be considered non-voluntary as you need to make these payments, but sacrificing into your super is voluntary, and therefore not considered an expense.
Maximum salary sacrifice into mortgage in Australia?
One of the reasons people salary sacrifice into their mortgage is to reduce their taxable income. However, while there is no official maximum amount that you can sacrifice into your mortgage, you need to be careful you’re not salary sacrificing a larger amount than you would otherwise be assessed on for tax, otherwise the strategy doesn’t benefit you financially. Your employer may also impose a limit on how much they will allow you to salary sacrifice.
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