A salary sacrifice arrangement is a simple and cost-efficient way to pay off your home loan if you work in certain industries.
When it comes to paying off your home loan, finding ways to save money is always a priority. Salary sacrificing is one option that you may want to take advantage of. It lets employees of eligible organisations pay for their home loan straight from their pre-tax salary, allowing them to pay less tax on the income they earn.
Being able to salary sacrifice your mortgage will depend on the company and industry you work in. It's usually only offered by employers in the health, charity and other not-for-profit industries and only for owner occupier home loans. Read on to find out whether this could be a viable option for you.
What is a salary sacrifice arrangement?
The idea of sacrificing your salary doesn’t sound like a great idea to many people, but it can give you a number of benefits. Also referred to as salary packaging, a salary sacrifice arrangement with your employer allows you to pay for certain items out of your pre-tax salary. For example, you could salary sacrifice your car loan repayments, your superannuation or even your childcare costs.
By using your pre-tax salary to pay off an ongoing expense, you will reduce your total taxable income, which means you end up paying less tax. Your employer may need to pay FBT on the benefits you receive (non-profit organisations are exempt from this tax up to a certain limit), so you’ll need your employer’s approval to do this. You can only set up a salary sacrifice arrangement on any future income you earn. This means you can’t salary sacrifice any salary that you have already earned.
What about the recently announced First Home Super Saver Scheme changes for the 2017 budget?
The Government announced in its 2017 budget that first home buyers will be able to salary sacrifice some of their income into their superannuation to be used as a deposit for a home.
The scheme will work by allowing first home buyers to make voluntary contributions into their super up to a maximum of $30,000, with a yearly cap of $15,000. Contributions made through this scheme will be taxed at only 15%, so those using it can save on tax.
Note that under this scheme first home buyers will not be able to withdraw their non-scheme super contributions to pay for their home, and will also have to wait at least one year before accessing the money to buy a home. Our budget guide has more information about how this scheme will work.
Can I salary sacrifice my home loan?
Depending on your employer, you may be able to use salary sacrifice to pay off your home loan. If you work for a public or private hospital, a non-government organisation or a not-for-profit organisation such as a charity, you may be eligible to salary sacrifice your mortgage. Ask your employer if the company is willing to support salary sacrificing, and check with the Australian Taxation Office to make sure you’re eligible to salary sacrifice your home loan. This option is typically only available to owner-occupiers, not to those paying off an investment property.
Next, you’ll need to check if your lender will accept salary sacrifice payments on your mortgage. Some banks will simply refuse salary sacrifice repayments outright, so you may need to shop around for a suitable lender. Shopping around is simple to do when you’re only thinking about applying for a home loan, but you will need to look into refinancing your existing loan if you already have a mortgage.
A salary sacrifice arrangement is worth considering if you earn a high income because you can enjoy significant tax benefits by reducing your taxable income. If you’re in any doubt about whether this option could work for you, ask your accountant for advice.
What are the benefits of a salary sacrifice arrangement?
If you’re eligible to salary sacrifice your home loan, this sort of arrangement can have several benefits.
- You pay less tax. This benefit sits right at the top of the list. Since a portion of your pre-tax income will be paid straight from your employer to your lender, you will be earning a reduced income as far as the tax office is concerned. This means that you will pay less income tax each financial year, which is good news in anyone’s language.
- Save on interest. Paying your mortgage from your pre-tax income means you have more money to put towards your repayments. As a result, you can get on top of your loan sooner and minimise the amount of interest you need to pay over the life of the mortgage. In other words, you’ll be able to pay the loan off and take ownership of your home sooner.
- More disposable income. Instead of dipping into your own pocket to make loan repayments, you can spend the income you receive as you wish. You could use it to go on a holiday or save for the future. You might even opt to put it towards extra repayments on your loan.
- Convenient. A salary sacrifice arrangement means your loan repayments come directly from your pay, which often means setting up a direct debit arrangement between your employer and your lender. This can remove some of the stress from the loan repayment process and help you pay off your loan without you even realising that you're doing it.
Traps to avoid
Be aware of a few potential pitfalls associated with salary sacrificing.
- Employer refusal. Some employers are concerned that a salary sacrificing arrangement will be too time consuming and costly to set up. This is not the case, so it’s up to you to convince your employer.
- Employer limits. Some employers will impose a limit on the amount of pre-tax income you can salary sacrifice each year. Check to see whether you will be able to put a sufficient amount towards your home loan repayments.
- Less super. As salary sacrificing reduces your income base, the mandatory super contributions your employer makes into your super fund will be smaller. Check with your employer to see whether this is the case and determine the impact this could have on your retirement savings.
- Fees. Some employers will charge you an administrative fee to cover the cost of setting up a salary sacrifice arrangement.
How to check if you can salary sacrifice your home loan
If salary sacrificing your mortgage repayments sounds appealing, follow these simple steps to check whether it’s the right home loan repayment approach for you:
- Speak to your employer. Ask your employer’s HR department whether the organisation is willing to let you salary sacrifice home loan repayments. Also, if you’re salary sacrificing other expenses, such as superannuation, you will need to check if doing the same with your mortgage repayments will affect those other arrangements.
- Ask your accountant. Salary sacrifice, home loan repayments and income tax can be confusing topics if your financial knowledge is limited. That’s why it’s a good idea to speak to your accountant or financial planner and get expert advice tailored to your specific needs. Your accountant or financial planner will be able to help you work out whether salary sacrificing your home loan will be a cost-effective option.
- Get in touch with a mortgage broker. Mortgage brokers are experts when it comes to finding a home loan that matches your financial needs. They will assess your finances, the features you want in a home loan and your desire to salary sacrifice. They will then present you with a selection of suitable loans from their panel of lenders. Alternatively, if you already have a home loan, you can start by contacting your current lender and finding out whether salary sacrifice repayments are accepted.