Wouldn't you like it if you could reduce the income tax you pay yearly and put extra money towards your home loan repayments? Unaware to most people, this is a viable option if you have a salary sacrifice mortgage.
Get ahead with this guide on everything you need to know about salary sacrifice mortgages, including how they work and the benefits they offer.
What is Salary Sacrificing?
Salary sacrificing is an arrangement in which your employer structures your total remuneration package between cash and other non-cash benefits instead of salary only.
If your employer is agreeable, then per the salary sacrifice arrangement, you must sacrifice part of your salary in place of an agreed non-cash benefit. Thus you can use part of your pre-tax dollars to pay for certain expense payments such as mortgage repayments, super contributions, and/or other expenses such as childcare, school fees, health insurance, etc.
In general, a salary sacrificing arrangement allows you to reduce your taxable income in a way that is also cost-effective to the employer. Salary sacrificing is also called salary packaging or total remuneration packaging by the Australian Taxation Office (ATO).
Employer Approval for Salary Sacrificing
Home loan repayments are categorised as' loans' or 'other personal expenses." Additionally, since your employer pays you a fringe benefit by making payments on your behalf, they may have to pay Fringe Benefits Tax (FBT) on the benefits you receive.
Therefore, you may need your employer's approval to proceed with a home loan salary sacrifice. If you're working for a not-for-profit organisation, then the employer is exempt from this tax to a specific limit.
Most importantly, you can set up the salary package or salary sacrifice arrangement only on any future income you earn. You cannot salary sacrifice any salary already earned by you in the past.
Does Salary Sacrifice Affect Mortgage Applications?
Whether you're salary sacrificing for a car, school fees, pension, or other purchases, it may affect your home loan application and borrowing capacity.
Some lenders assess the borrower's gross income using regular tax rates. In that case, those working for not-for-profit organisations generally receive a much higher after-tax disposable income than others on a similar gross salary. This improves their chances of getting approved for a home loan.
1. When Lenders Consider Salary Sacrificing as Expense Payments
For starters, when you apply for a home loan, some lenders may consider your salary sacrifice an expense, not part of your income. This may reduce your borrowing power significantly.
So, suppose $4,000 of your pre-tax income is towards your salary sacrifice arrangements. In that case, some lenders may decrease your income by that amount.
Some lenders may view your salary package as an expense depending on where your money is going. So, for example, if you’re salary packaging for childcare or car payments, it'll be considered an expense. On the other hand, your super contributions may be regarded as voluntary since it's not compulsory payments.
2. When Lenders Consider Salary Sacrificing as Voluntary Payments
At the same time, some lenders may consider your sacrificed salary as a voluntary payment. This would, therefore, automatically boost your borrowing power.
For this reason, you should seek professional advice. Your mortgage broker would be able to help you access a suitable salary sacrifice home loan.
How to Salary Sacrifice Mortgage
The mortgage salary sacrifice agreement should be set up in advance as sacrificing arrangements only apply to your future salary payments and not to past payments.
However, if you plan to utilise this arrangement at a later stage in your employment and if your employer is agreeable, you should revise the terms of your current job in a new written agreement.
Here's how to salary sacrifice mortgage in a planned manner:
- Seek expert advice: Consult your tax expert to review your financial situation and determine if salary sacrificing mortgage payments is a suitable strategy to offer you tax savings. If you want further clarity, do connect with ATO to be doubly sure about your eligibility for salary packaging.
- Employer approvals: Discuss with your employer if they provide salary-packaged benefits per company policy. If you're considering the option of a home loan salary sacrifice, you must have it in a written contract of employment between you and your employer.
- Explore home loan deals: Do your bit of research and shortlist a home loan that matches your needs. Where you already are with a loan, refinancing your existing home loan may help you get a better deal.
- Discuss your salary sacrifice repayments with your lender, ensuring they consider your gross earnings.
- Set up repayment dates: Your contract should include the terms and amount of the salary sacrifice and the details of your lender to whom the mortgage payment will be made.
Do you Pay Tax on Salary Sacrifice?
Essentially, salary sacrificing mortgage payments and other non-cash benefits helps boost your tax saving while reducing your tax bill.
- Consider the example: You want salary packaging of $150,000. Your employer pays $125,000 as income and $25,000 as other salary-related benefits.
- With your taxable income lowered to $125,000, you enjoy your salary-packaged benefits while paying less income tax.
In a nutshell, your total taxable income is reduced when you pay your mortgage out of your pre-tax salary. Thus, you’ll pay less tax while still being able to purchase a house.
Can I Salary Sacrifice my Mortgage?
Salary sacrifice may be possible depending on the organisation you're employed with and your sector.
Mortgage payments are generally a fully taxable fringe benefit. Therefore, the salary sacrificing option does not suit most employers’ interests. Most employers will offer salary sacrifice for super but may impose restrictions on who can package other benefits.
In general, salary sacrificing is more suitable for the following:
- Home loan borrowers on middle to high incomes: If your annual income is lower than $100,000, salary sacrificing mortgage payments may not be feasible.
- Those working with a non for profit organisation or charitable institution: These organisations are either exempt from Fringe Benefits Tax (FBT) or receive a 47% rebate on the FBT. Since it is cost-effective for them, you may be able to package your pre-tax salary. Salary sacrificing is more accessible to employees in these organisations. Moreover, these organisations often offer salary sacrificing as an incentive to work with them despite a low wage.
- Owner-occupiers: Mortgage salary sacrificing is generally available only for owner-occupiers and not those paying off their investment property loan.
It's important to note that once the packaging is in place, you cannot access the sacrificed salary amount while the agreement is in effect. Your mortgage will be deducted from your pre-tax salary and paid off to your lender.
Salary Sacrifice Mortgage Eligibility
As per the ATO, to be eligible for salary sacrifice, you must have a salary sacrifice arrangement with your employer before starting work, or it may be ineffective.
In addition, the agreement between you and your employer must meet the following requirements:
- Preferably be a written agreement: You and your employer should clearly state and agree on all the terms of any salary sacrifice arrangement. Where the arrangement an undocumented, you may find it challenging to prove the facts of your agreement.
- Renegotiations: You (the employee) can renegotiate your salary sacrifice arrangement at any time, subject to the terms of the contract of employment or industrial agreement. In addition, you can renegotiate amounts of salary packaging before the start of each renewal in case of a renewable contract.
- Details: Your employment contract should include your remuneration and any salary sacrifice arrangement.
How Much Can I Salary Sacrifice On My Mortgage?
If your employer does not have to pay FBT, they can offer non-cash benefits without FBT, up to the following limits:
- $17,000: If you're a public hospital or ambulance service employee.
- $30,000: If you're employed at a health promotion charity or a non-hospital Public Benevolent Institution.
- $30,000: If you're an employee of other not-for-profit organisations, registered charities, some educational organisations, employer associations and trade unions. They are only allowed a rebate of 47% of FBT payable..
For other employers, salary sacrificing mortgage payments may be unsuitable unless you (the employee) are subject to the top marginal income tax rate.
Benefits of a Salary Sacrifice Arrangement
While salary sacrifice mortgage isn't suited for all home loan borrowers, those who can access them enjoy the following benefits:
- Tax savings: A portion of your pre-tax salary goes to your lender as per the arrangement. Though you may feel that you’re earning less income, you’ll, for a fact, be paying less tax every year.
- Pay off your home loan sooner: When you salary sacrifice your home loan, you pay lower income tax. Thus, you can spend these savings on other expenses. For example, you can pay off your loan faster and reduce interest payments over the loan's lifetime.
- A rise in disposable income: With more income, you can achieve your personal lifestyle goals. For example, you can spend extra cash on a vacation, a new car, etc., instead of on more significant loan repayments.
- Convenience: The salary-sacrificing arrangement lets you conveniently make home loan repayments. With your employer managing the mortgage repayments, you have one less personal financial obligation to handle.
Limitations of a Salary Sacrifice Arrangement
Salary sacrificing home loans can be a great way to get ahead on a mortgage. However, before you start, there are a few things to be aware of:
- Employers may not approve: If it is time-consuming, costly, and does not suit your employer's interest, you could find your salary sacrifice home loan agreement vetoed.
- Lower take-home salary: Although you may be able to increase your contributions, this will likely mean a lower take-home salary. This could put pressure on your financial situation and household budget and make it more difficult to meet ends. It may also result in mortgage stress because you're essentially paying more money towards your loan each month.
- Reduced benefits and superannuation: Your employer pays contributions on your net income after the expense payments are made on your behalf. This means your retirement savings are lower than they would have been without the salary sacrifice. You'll also have to face the possibility of reduced salary benefits e,g., overtime payments, etc., which are based on earnings after deduction of pre-tax expense payments.
- Administration fees: As administrative functions are involved, some employers may add a fee to implement your salary packaging.
- Cash flow crunch: If you require smooth and regular cash flow, in that case, locking your money up in home loan repayments may not suit your financial situation.
Is Salary Sacrificing Mortgage Worth it?
If you're considering salary sacrificed mortgage payments, you should consider your employer, tax bracket, and financial situation.
If you’re receiving other salary-related benefits, arranging salary sacrifice repayments on your home loan might not be cost-effective.
What to Consider Before Salary Sacrificing?
In addition to weighing in the pros and the cons, keeping in mind the following factors will give you a clear idea if salary sacrificing for your home loan is the right move for you:
- Your industry: Mortgage salary sacrificing could help you save a significant sum if you’re in an industry that doesn’t tax employee benefits.
- Your tax bracket: Even if you benefit from tax savings, the amount could be even higher if you’re in the maximum tax bracket. For example, you would be taxed 45% on your income of around $185,000. However, salary sacrificing approximately $20,000 a year will lower your tax bracket, thus saving roughly $7,800 yearly.
- Employer and lender approvals: If you are looking at salary sacrificing for your mortgage, check with your HR department about their options. In addition, also check with the ATO to ensure you are eligible for the benefit. Furthermore, check with your lender if they accept salary sacrifice repayments. Many banks don't accept this arrangement.
- Your circumstances: Salary sacrificing reduces the amount of superannuation and affects cash flow, salary-related benefits, and your finances. Negotiate with your employer if you want these benefits protected. Otherwise, you may want to reconsider your decision.
- First Home Super Saver Scheme (FHSS): You could also consider the FHSS scheme, which allows employees to save money for their first home inside their super fund. For this, you can make voluntary concessional (before-tax) and voluntary non-concessional (after-tax) contributions into your super fund. You can fund your new home purchase by accessing your voluntary contributions and associated earnings on meeting eligibility requirements.
Other Types of Salary Packaging
Other than home loan repayments, salary sacrifice arrangements also include:
Super Contributions
This is the most common type of salary sacrificing agreement, wherein both your employer and you may agree to pay part of your salary into your superannuation. As done in some cases, your lender may treat this as a voluntary contribution, adding it to your income when assessing your loan application.
Rent
Your employer may be agreeable to pay your rent from your pre-tax salary. But, some lenders do not find this suitable because they feel your benefits will cease when you buy a house.
Novated Lease
In this arrangement, employers agree to pay for the cost of leasing and running a vehicle from your pre-tax income.
Electrical Goods and Bikes
Your phone, laptops, and other minor electrical books can be included in sacrificing packages.
Likewise, your employer may incentivise cycling to work by paying for your bike from your pre-tax salary.
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