Salary sacrificing your mortgage (Bet you didn’t think repaying your loan could save you money!)

Salary sacrificing your home loan means your employer will pay your repayments for you out of your pre-tax salary. Although this reduces your take-home pay, you'll pay less in income tax. Hoorah!

Can I salary sacrifice my mortgage repayments?

Not every employer offers salary sacrificing. You can salary sacrifice your mortgage repayments if:

• Your employer offers this benefit to employees (kind of a key one!)
• You are making repayments on a property you live in, not an investment property.
• Your employer is an FBT-exempt organisation (a public hospital, charity or non-profit).
• Your lender accepts salary sacrifice payments on your mortgage (if it doesn't you could refinance your home loan).

If you want to find out whether you can salary sacrifice your home loan repayments you just need to ask your employer.

If you need expert guidance on your mortgage or taxes, it's worth speaking to a mortgage broker or an accountant.

How salary sacrificing your mortgage repayments works

Under a home loan salary sacrificing arrangement, your employer pays off your monthly mortgage repayment directly from your pre-tax income. This means your monthly paycheque will be smaller, but when you consider you'd be paying off your home loan from your post-tax salary anyway, it can often work out better.

And at tax time, you'll pay less tax. That's a pretty good deal. The catch, unfortunately, is most employers don't offer this benefit because they have to pay tax on the benefit instead.

Home loan salary sacrifice – example

• Your annual salary is $90,000 before tax, or $7,500 a month.
• Your mortgage repayment is $2,500 a month ($30,000 annually).
• Your employer offers to pay your $2,500 monthly repayments and reduces your monthly salary to $5,000 a month before tax.
• Your taxable income has shrunk from $90,000 to $60,000.
• Instead of paying $19,717 in taxes (including the Medicare levy) your tax bill shrinks to $9,967.
• You save $9,750 in taxes.

FBT costs

In the above example the employer would have to pay a Fringe Benefits Tax (FBT) on the $30,000 mortgage repayment benefit.

The ATO calculates FBT by multiplying the value of the benefit at 1.8868.

• 1.8868 x 30,000 = $56,604

And then this amount is taxed at 47%, equalling a tax obligation of $26,603.88 to the employer. This is why salary sacrificing for an employee's mortgage repayments is really only offered by organisations with FBT-exempt status.

Compare home loan rates and get a better deal

What are the advantages and disadvantages of salary sacrificing?

Salary sacrificing can come with benefits, but as with anything there are things to consider as well.

Benefits

• Making your repayments from your pre-tax salary means you pay less income tax.
• By saving money on your income tax you have more money to put towards extra mortgage repayments and therefore pay less interest.
• If you don't (or can't) make extra repayments towards your loan, you'll have more disposable income.
• You don't need to worry about making your home loan repayments, it's all taken care of before you're paid!

Considerations

• Your take home pay is lower which, depending on your circumstances, can limit spending power.
• Lower income earners may not benefit as much as higher income earners who pay higher income tax.
• You typically cannot salary sacrifice for an investment property.
• Your home loan repayment may go above the FBT exemption thresholds.

What is Fringe Benefits Tax (FBT)?

In case we jumped in too soon with talking about Fringe Benefits Tax, let's explain what it is and how it works.

A fringe benefit is where the employer pays for the employee in a way that's different to a salary or a wage. That includes salary sacrifice arrangements, like for car loans or leasing, mortgage repayments or even school fees. It can also include other costs that don't come out of your salary, like visa costs, gym membership or car parking.

All of these things get taxed through Fringe Benefits Tax, which is the responsibility of the employer.

Work-related items such as protective gear, software or computers are exempt from FBT.

Superannuation is also not considered a fringe benefit. According to the ATO super contributions under salary sacrifice arrangements "are considered employer contributions. These are not fringe benefits if the contributions are made to a complying super fund".

Which organisations are FBT exempt?

As already highlighted, some companies are exempt from FBT. These are the companies most likely to offer salary sacrificing. Not-for-profit organisations may qualify for FBT-exempt status. According to the ATO the following types of organisations are exempt:

• Public benevolent institutions (charities whose work relates to poverty, sickness or disability).
• Health promotion charities (registered by the Australian Charities Commission and endorsed by the ATO).
• Public and not-for-profit hospitals.
• Public ambulance services.

FBT exemption thresholds

There are thresholds for FBT exemptions. The total value of the benefits offered can't exceed $17,000 for hospitals and ambulance services or $30,000 for public benevolent institutions and health promotion charities.

These thresholds are for the "grossed up value" of the fringe benefits. That's the dollar amount of the benefit you receive, multiplied by 1.8868.

So in our calculation example above, the value would be above the threshold for hospitals and ambulances.

What about the First Home Super Saver Scheme?

Under the First Home Super Saver Scheme first home buyers can salary sacrifice some of their income into their superannuation to be used as a deposit for a home.

You can make extra contributions to your super, get taxed at the lower rate of 15% and then withdraw the money to form part of your deposit.

While this is a form of salary sacrificing it is different to the mortgage repayment arrangement outlined on this page.

Frequently asked questions about home loan salary sacrifice

• Is salary sacrificing my home loan repayments worth it?

  A salary sacrifice arrangement is worth considering particularly if you earn a high income because you can enjoy significant tax benefits by reducing your taxable income.

  If your employer offers salary sacrificing as an option, you should do the calculations to see whether you would benefit from salary sacrificing. If you're in any doubt about whether this option could work for you, ask your accountant for advice.

• What happens if my mortgage repayments increase while I salary sacrifice?

  If your interest rate increases (and therefore your mortgage repayments) you will end up sacrificing more of your salary. Considering you'd be paying the higher repayments regardless of if you were salary sacrificing or paying from your post-tax income that would happen either way. One problem with your mortgage repayments increasing though is that you could end up going over the FBT threshold. In this case, your employer will need to pay FBT on the amount above that threshold.

• Can I refinance or top up my home loan while I salary sacrifice?

  If you want to amend your home loan, whether by topping up the loan amount, refinancing your loan or readjusting the loan term, you will need to talk to your employer first. In some of these situations your repayments may increase and that could mean your employer ends up paying FBT. Even if your repayments are going to decrease, perhaps by extending the loan term, it's important to check that your employer is happy to continue the agreement for a longer term.

  If you're thinking of refinancing, you will need to check with your new lender that they accept salary sacrifice repayments as not all do.

• Is there a limit to how much I can salary sacrifice?

  Although there's no limit to how much you can salary sacrifice, you could put yourself at risk of financial hardship by sacrificing too much unnecessarily. You would also increase the amount your employer would need to pay in FBT.