Salary Sacrifice Mortgage • All You Need to Know

In Australia, salary sacrificing a car or one’s superannuation are both popular savings strategies.

However, there’s another effective strategy you can use when it comes to what you can salary sacrifice; that is, to salary sacrifice your mortgage.

Although salary packaging your mortgage is a lesser-known method of maximising your earnings, it can benefit you in terms of after-tax benefits and help reduce your overall home loan interest bill.

Moreover, when you salary sacrifice your home loan, you’ll be paying your mortgage from pre-tax dollars. Therefore, you may end up having more disposable income that you can set aside for building an investment portfolio or your dream holiday.

If you’re unsure whether you can salary sacrifice mortgage payments, here’s a helpful guide on everything you need to know about this salary packaging option.

What is salary sacrificing?

Salary sacrificing or packaging is a strategy that involves agreeing with your employer to structure your total remuneration package between cash and other benefits, instead of receiving it entirely as salary. This means your pay will comprise both cash and non-cash benefits.

These non-cash benefits may include a novated car lease, super contributions, school fees and so on. In a salary sacrifice mortgage, you agree to have the non-cash benefits to take the form of mortgage repayments.

Salary sacrificing allows you to stretch your earnings through after-tax benefits while also costing your employer very little.

Can you salary sacrifice your mortgage?

If your main question is: Can I salary sacrifice my mortgage? As mentioned earlier, you certainly can.

When you salary package your home loan repayments, you’ll be paying your mortgage using your pre-tax income. This is one way of indirectly yet effectively getting a discount off your loan. And whichever tax bracket you are in, you will benefit since your mortgage payments are made before you even pay any tax on your income.

Additionally, salary sacrificing your mortgage can help reduce the duration of your loan term. This is because having the option to use your pre-tax earnings for loan repayments gives you the ability to increase the amount without you ever feeling the pinch.

If you want to set up your mortgage for salary sacrificing, the steps are fairly straightforward and easy.

Communicate with human resources: Check with your employer if salary packaging your mortgage is allowed. Inquire about any implications or effects for other expenses that are already packaged. In general, it is quite often possible to modify or include new terms in your existing salary sacrificing agreement. In this case, you may be asked to fill out an amendment form with the new terms of your salary packaging agreement included.
Speak to a mortgage broker: To know if you can switch your mortgage to a type that allows salary packaging, you should speak to a mortgage specialist or broker right away. This way, you can clarify all the details and perhaps even get a better interest rate.
Update repayment details: Since your repayments will come directly from your pay to the lender, the repayment dates must be set up to match your salary payment dates to ensure you avoid arrears.

Can you salary sacrifice mortgage interest and principal?

Salary sacrificing your mortgage or home loan includes both the principal and interest, so our answer to this question is a resounding yes!

Who can salary sacrifice a mortgage?

When you are considering a mortgage salary sacrifice, one of your fundamental concerns would be knowing who can salary sacrifice a mortgage. Can teachers salary sacrifice their mortgage? How about engineers, doctors and social workers?

It’s important to note from the outset that your ability to salary sacrifice your mortgage largely depends on the company and industry you are part of. Mortgage salary packaging is usually only offered to employees in the health, public benevolent institutions (PBIs) or charities and other not-for-profit industries.

However, even if you belong to an industry that allows salary sacrificing your mortgage, not all lenders support the salary sacrificing of home loan repayments. In such cases, your only option would be to refinance with a lender that allows salary sacrifice.

Moreover, the salary sacrificing of mortgage payments is only allowed for owner-occupier loans and not for investment loans.

Benefits of a mortgage salary sacrifice arrangement

If you are eligible to salary package your home loan, there are some important benefits to be had as mentioned in the introduction. Below is a detailed explanation of those benefits.

Tax savings: As previously mentioned, tax savings are a major benefit in mortgage salary sacrificing. Since your mortgage payments are deducted from your pre-tax income – from your employer to your lender – you will be receiving a reduced income as far as the Australia Taxation Office is concerned. Therefore, you will be expected to pay less income tax in every financial year as long as your mortgage salary package remains active.
Savings on interest: When you have the option to pay your mortgage from your pre-tax earnings, you actually have more money to allocate toward your repayments. This means you can pay off your loan sooner. You also reduce the amount of interest you’ll be paying for the duration of your mortgage. When this happens, you’ll be able to take possession of your home sooner as well.
Additional spending money: You’ll have more disposable income in the form of after-tax savings. This means more money in your pocket for increasing your loan repayments. You also have the option to spend this extra cash as you wish. You could put it away as part of your savings, emergency fund or even your retirement fund. You could also use it to save for your dream ocean cruise or some other holiday package.
Convenient, on-time mortgage payments: When you have a salary sacrifice arrangement for your mortgage, loan repayments are deducted directly from your pay. This is a lot like having a direct debit arrangement between your employer and your lender. Since you won’t have to make loan repayments separately from your account, this could reduce the stress of paying for the loan. You won’t need to make separate arrangements for loan repayment. Also, there’s no chance of you making late payments and getting penalised. In fact, you’ll be able to pay off your loan in due course without you even noticing it.

Is salary sacrificing a mortgage considered a fringe benefit?

Employee benefits may be subject to fringe benefits tax (FBT). This is a tax is paid by some employers for benefits paid to an employee on top of their salary.

However, employers belonging to certain sectors may be entitled to an FBT exemption or rebate. This means they can provide salary packaged benefits (including mortgage salary sacrifice, depending on the industry or sector) to their employees in a more cost-effective manner.

These FBT-exempt employers are able to provide FBT-free benefits to their employees, subject to the following specific limits or capped amounts:

$17,000 for a public hospital or public ambulance service employee
$30,000 for a health promotion charity or a non-hospital public benevolent institution (PBI) worker

But since this is sector- or industry-specific, it is generally limited to certain hospitals, registered charities and other not-for-profit establishments.

For employers not included in these categories, it would likely be financially disadvantageous for them to allow salary sacrificing mortgage payments, unless the employee in question is subject to the top marginal income tax rate.

How to save tax in a mortgage salary sacrifice agreement

Although salary sacrificing a mortgage isn’t a very well-known or common strategy, it’s worth finding out how much money you can save simply by making use of this option. This is especially significant if you belong to an industry where mortgage salary packaging is allowed.

To illustrate, let’s cite an example using Easi’s salary sacrifice mortgage calculator.

For example, Sarah is an employee in the health sector in Western Australia earning a base annual salary of $110,000. Her mortgage payments per year amount to $16,899.

If Sarah does not know about or chooses not to salary sacrifice her mortgage, her after-tax and Medicare salary would amount to $79,152 per year. But after Sarah pays for her mortgage with her after-tax earnings ($79,152 - $16,899), her net cash available would be $62,253.

But if Sarah decides to salary package her $16,899 mortgage, her after-tax salary would be $68,316.

While Sarah’s after-tax salary of $68,316 (with salary sacrificing) is lower than $79,152 (without a mortgage salary sacrifice arrangement), it must be remembered that her mortgage payments have already been covered here.

Therefore, the amount of Sarah’s net earnings ($68,316) with a mortgage salary sacrifice is much higher than without ($62,253). If you deduct $62,253 (no salary sacrifice, with annual mortgage deducted) from $68,316, there would be a $6,063 difference. This is the amount you can save on a yearly basis simply by using a mortgage salary sacrifice arrangement.

If you want to have a fair idea of how much you can save by salary sacrificing your home loan, you can use the same salary sacrifice mortgage calculator from Easi.