When most people think of salary sacrifice, they think of super contributions. However, salary sacrificing could also be used to pay other expenses, such as your mortgage repayments, childcare expenses, car loans and health insurance.
In this article, we’ll be focusing on how to use salary sacrificing to pay off your home loan.
How does salary sacrifice work?
Salary sacrificing, also known as salary packaging or total remuneration packaging, is an arrangement between you and your employer which allows you to use part of your before-tax salary to pay certain benefits.
These benefits replace what you would receive as a salary. This means that your take-home pay would be smaller, but you would pay less tax on your income.
Which benefits can you include in the arrangement?
According to the ATO, there is no restriction on the types of benefits you can add to a salary sacrifice arrangement as long as they form part of your remuneration.
The most common benefits include:
- Fringe benefits such as loan repayments, school fees, childcare costs, and cars.
- Exempt benefits such as laptop computers, protective clothing or a tool of trade.
Who is eligible?
The first thing you will need to find out is if your employer is willing to consider a salary-sacrificing arrangement with you.
Not all employers allow salary sacrificing as they may be required to pay fringe benefits tax (FBT) for their employees’ benefit. Some industries, such as health, charity and not-for-profit, are usually entitled to an FBT exemption or rebate, making salary packaged benefits easier to implement.
Next, you should check with your lender if they will accept salary sacrifice payments on your mortgage. Not all lenders will, so it’s essential to do your research before committing to anything.
Salary sacrificing is usually only available for owner-occupier home loans.
Example: salary sacrifice of a home loan
Georgina works for The Royal Women’s Hospital as a nurse. Her salary is $80,000 per year before tax.
Before salary sacrificing, Georgina’s tax payable is $ $18,067 at the time of writing, which leaves Georgina with a $61,933 net pay.
Georgina is permitted to salary sacrifice her mortgage payment up to $8,866 per year. This payment is taken out pre-tax, meaning that while Georgina’s salary is still $80,000, her taxable income after the salary sacrifice is now $71,134.
Tax on $71,134 is $15,008 resulting in a savings in tax of $3,059 per year.
If Georgina were to use these tax savings to make additional payments onto her $400,000 mortgage, she could save up to $61,355 in interest and pay off her loan in 20 years and 9 months instead of 25 years.
Important things to consider
While the benefits of a salary sacrifice arrangement are pretty straightforward, there are other important things you should consider before considering a salary sacrifice arrangement.
- Some companies might charge you an administrative fee to set up this arrangement.
- Some companies may also limit the amount of pre-tax income you can salary sacrifice each year.
- This arrangement may affect your eligibility for some tax offsets, government benefits, the Medicare levy surcharge, and child support payments.
It is a common mistake to assume that your employer’s mandatory super contributions into your super fund will be smaller. It is still your employer’s responsibility to pay your full super guarantee entitlements as though there was no salary sacrifice.
If salary sacrificing your mortgage repayments sounds like an option you’d like to explore but are not sure where to start, talk to one of our experienced brokers. They will help you find an option that matches your financial needs and will present you with a selection of suitable loans.
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Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced, or republished without prior written consent.
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