Salary sacrificing your mortgage is a great strategy to:
- Handle your finances
- Decrease your taxable income
- Pay off your home loan earlier
Salary sacrificing – or salary packaging, as it’s sometimes referred to in Australia – is an agreement you have with your employer where you are paid part of your salary in non-cash benefits.
This strategy will be extremely helpful to people who want both tax savings and reductions in their mortgage debt balance.
Below is a detailed guide on how to salary sacrifice your mortgage and what to consider.
What Is Salary Sacrificing?
Salary sacrificing is diverting part of the pre-tax amount of your salary into specified expenses such as:
- Superannuation
- Car leases
- Mortgage repayments
By doing so, your amount of taxable income reduces, hence saving a substantial amount in taxes.
However, salary sacrificing your mortgage isn’t as easy as it seems. Unlike superannuation or car leases, there are more restrictions and considerations associated with applying this benefit to home loans.
Can You Salary Sacrifice Your Mortgage in Australia?
While salary sacrifice applies to superannuation and cars in most scenarios, there are special conditions for mortgage payments. Your employer may not have this benefit available and must approve the salary sacrifice; it also needs to be approved by the Australian Taxation Office as per their regulatory provisions.
Expense That Can Be Salary Sacrificed
- Superannuation Contribution: This probably is the most available form of salary sacrifice option wherein you take pre-tax contributions into your superannuation fund account
- Novated Car Leases: This is when you sacrifice pre-tax income to use money to pay for car lease
- Laptop and Work Equipment: Certain employers allow work-related equipment to be salary sacrificed
For mortgages, however, it would depend on the policies of your employer and certain financial arrangements in place;
How to Salary Sacrifice Your Mortgage
This is how you can put this idea into practice:
1. Check Employer Policies
The first requirement is to check to see if your employer offers mortgage salary sacrificing. Not all employers generally offer it, and it is mostly practiced within industries that have generous salary packaging options, particularly in the healthcare sectors or non-profit organisations.
2. Understand Tax Implications
It reduces your taxable income, which may lower the tax paid. For example, if you make $100,000 a year and sacrifice $10,000 in the direction of paying down mortgages, then you will be left to pay tax on only $90,000. It could bring you to a lower threshold and hence have some kind of money saved.
However, you shouldn’t forget fringe benefits tax. Mortgage repayments may attract FBT, which employers are liable to pay. In other words, the potential saving that arises because of salary sacrifice may get negated by this tax, unless the employer has specific exemptions or special arrangements covering such cases.
3. Discuss With a Financial Advisor
You should visit a financial advisor to understand how mortgage salary sacrifice fits into your overall financial plan. They would help you know about tax implications, possible savings, and the validity of such a move concerning your long-term financial goals .
4. Set up Arrangement with Your Employer
If your employer allows mortgage salary sacrificing, you will want to formalise an agreement. It would typically involve the amount of money that is being sacrificed and whether it complies with the ATO. The agreement would state how the money is channeled toward the mortgage.
5. Ongoing Review
After the salary sacrifice agreement is put in place, you should regularly review how well it is working. Changing income, tax laws, or personal finance goals may require adjusting the agreement.
Benefits of Salary Sacrificing Your Mortgage
Why would you want to explore salary sacrificing?
1. Tax Savings
Because your taxable income is reduced, there is a corresponding reduction in overall taxes payable through salary sacrifice. Of course, this is a no-brainer for high-income earners because the reduced income may push them into a lower tax bracket.
2. Faster Mortgage Repayment
Through the use of pre-tax income to a mortgage, faster repayment of loans results. That reduces the total interest that would be paid on a loan during its term and could save thousands of dollars.
3. Simplifies Financial Management
Salary sacrificing streamlines personal finance as all or part of your income automatically begins to get allocated to the mortgage. This may automatically reduce impulsive spending, thereby leading to regular debt repayment.
Possible Disadvantages
Are there any cons to salary sacrificing?
1. Fringe Benefits Tax
Payable by the employer under FBT, salary sacrificed benefits, including mortgage payments, are liable for this tax. It may render employers shy to offer mortgage salary sacrifice. Some employers may pass this FBT cost on to the employees, which may diminish the savings associated with it.
2. Limited Employer Participation
Mortgage salary sacrificing may not be extended to all employees. Even when extended, the administrative burden or their FBT burden may render them shy of it.
3. Reduced Take-Home Pay
Salary sacrificing may reduce the taxable income but is also likely to reduce the take-home pay. This may reduce the prospect of an individual to pay for other living needs, so careful budgeting is required.
Alternatives to Salary Sacrificing Your Mortgage
If salary sacrificing your mortgage isn’t feasible, consider these alternatives:
1. Extra Repayments
Making extra repayments from after-tax income can still accelerate the mortgage repayment and save on total interest. Most lenders do not penalise extra repayments, so check with your lender.
2. Offset Accounts
An offset account is generally a savings account linked to your mortgage and offsets the amount of interest applied. If you put your savings into the account, you are effectively decreasing your mortgage balance, which could save you lots of interest in the long run.
3. Redraw Facilities
Redrawing is available under some mortgages, which means if you need it, you can draw down on extra repayments. This will be helpful in managing your cash flow while paying off your mortgage.
4. Refinancing
You could refinance to a lower interest rate, thus reducing the costs of your mortgage. It will save money to make further repayments or invest elsewhere.
6. Financial Counseling and Support Services
If you find difficulty in making mortgage repayments, then seeking advice from financial counselors will be helpful. They provide the following services:
- Personal advice and strategies regarding how to handle your debt
- Explore hardship programs
- Bargain with lenders on your behalf
Conclusion
Salary sacrificing your mortgage in Australia will significantly lower your taxable income and allow you to pay your home loan much faster. However, this is not universally applicable and does come associated with certain considerations like employer policies and fringe benefits tax implications.
Discuss this with your employer and a financial advisor first to make sure that this would fit within your financial goals and situation. Where salary sacrificing cannot be opted for, other options that could be helpful in the servicing and reduction of your mortgage could include extra repayments, offset accounts, and refinancing.
Remember, the key to successful mortgage management depends on keeping yourself informed about all developments and seeking professional advice, besides regular reviews in line with changed circumstances.
