Can you salary sacrifice a home loan?

Can you salary sacrifice a home loan?

In Australia, some industries allow employees to reduce their tax liability by what is called salary sacrificing or using your pre-tax income to pay for a few expenses. You may be able to take advantage of a salary sacrificing arrangement for a home loan or car loan payments, or your children’s school fees or childcare, or to buy a new mobile phone or smart TV, or for your health insurance premium. However, you will need to confirm that your lender will accept salary sacrifice home loan payments and that your employer approves of such payments. 

How to salary sacrifice home loan

As a salaried person, you’re probably aware that the money you take home is what remains after deducting the tax you may need to pay. Most mortgage lenders estimate your borrowing power based on this amount, as well as your expenses or other debt repayments. 

However, if you’re working for a charity, a not-for-profit organization, or in the health industry, you may have the option to salary sacrifice, sometimes called salary packaging, and claim a part of your income as fringe benefits. For instance, if your employer allows salary sacrificing and you are hired at $150,000 per year, you can choose to receive a part of it, say $20,000, as benefits. 

To use salary sacrifice for home loan payments, you’ll need to take the following steps: 

  • Check with your employer: Some of the benefits that you can salary sacrifice, including home loan payments, may require your employer to pay a fringe benefits tax, which the employer may not always agree to do. Again, the employer may prefer that you salary sacrifice to your super fund. 
  • Check with your lender: Usually, you can salary sacrifice for home loans only if you plan to live in the house yourself, and not if you’re buying property for investment purposes. Even homebuyers planning to become owner-occupiers may find many lenders unwilling to accept a salary sacrificing arrangement. 
  • Check your eligibility with the Australian Tax Office (ATO): Salary sacrifice home loan payments may require you to meet certain ATO eligibility conditions. Not all employees in industries where such arrangements are possible are eligible.
  • Check your tax calculations: The big reason for salary sacrificing is bringing down your taxable income, so you need to ensure you aren’t salary-sacrificing a larger amount that may get assessed for tax. You may need to consult an accountant to confirm your tax calculations. 

Remember that you need to discuss the salary sacrificing arrangement with your employer before you take up the job, and the arrangement should preferably be confirmed in writing. 

What are the pros and cons if I salary sacrifice into a home loan?

As with most financial decisions, salary sacrificing home loan repayments has both advantages and disadvantages. The advantages, apart from reducing your tax liability, can include: 

  • Increasing your savings: While salary sacrificing home loan payments does diminish your take-home income, you will have one less payment to make from your wages. You can potentially save more from your income, and perhaps even expedite your home loan repayment. The convenience of not having to sort out payments after you get your salary is a bonus.
  • Bringing down the overall cost of home loan: The cost of your home loan is based on the total interest you have to pay over the full home loan duration. The faster you can repay your home loan, the lesser the interest paid on it.

On the other hand, the disadvantages of a salary sacrificing arrangement include:

  • Locked-in benefits: You cannot access the salary sacrifice part of your income as long as the arrangement with your employer is valid. And if you don’t use the amount for salary sacrifice payments, you will have to pay tax on it at your regular rate. 
  • Reduced super contributions: If you salary sacrifice into a superannuation fund, or super, it’s counted as your employer’s contribution and not your contribution. You’ll effectively be repurposing this amount for home loan repayments or other expenses.
  • Impact on other salary-related benefits: Before you get into a salary sacrificing arrangement, you should check how it can impact your overtime or holiday benefits. 

Which is preferable: salary sacrifice super or home loan?

If you are eligible for salary sacrificing, you can use it for super contributions or home loan payments, among other things. If you choose to salary sacrifice into your super fund, this contribution is considered additional to the contribution your employer makes to the fund. Again, your salary sacrificed super contribution doesn’t reduce your ordinary earnings, which is the basis for calculating your employer’s super contribution. This implies a greater saving in your super fund, which you may be able to use instead of a salary sacrifice for home loan deposit through the First Home Super Saver Scheme. However, this won’t be possible if you salary sacrifice into a home loan.

Did you find this helpful? Why not share this article?

Advertisement

RateCity

Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By signing up, you agree to the ratecity.com.au Privacy & Cookies Policy and Terms of Use, Disclaimer & Privacy Policy

Advertisement

Learn more about home loans

How is the flexibility score calculated?

Points are awarded for different features. More important features get more points. The points are then added up and indexed into a score from 0 to 5.

How can I get a home loan with no deposit?

Following the Global Financial Crisis, no-deposit loans, as they once used to be known, have largely been removed from the market. Now, if you wish to enter the market with no deposit, you will require a property of your own to secure a loan against or the assistance of a guarantor.

What is the average annual percentage rate?

Also known as the comparison rate, or sometimes the ‘true rate’ of a loan, the average annual percentage rate (AAPR) is used to indicate the overall cost of a loan after considering all the fees, charges and other factors, such as introductory offers and honeymoon rates.

The AAPR is calculated based on a standardised loan amount and loan term, and doesn’t include any extra non-standard charges.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

What does going guarantor' mean?

Going guarantor means a person offers up the equity in their home as security for your loan. This is a serious commitment which can have major repercussions if the person is not able to make their repayments and defaults on their loan. In this scenario, the bank will legally be able to the guarantor until the debt is settled.

Not everyone can be a guarantor. Lenders will generally only allow immediate family members to act as a guarantor but this can sometimes be stretched to include extended family depending on the circumstances.

How often is your data updated?

We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

What is appreciation or depreciation of property?

The increase or decrease in the value of a property due to factors including inflation, demand and political stability.

What is a construction loan?

A construction loan is loan taken out for the purpose of building or substantially renovating a residential property. Under this type of loan, the funds are released in stages when certain milestones in the construction process are reached. Once the building is complete, the loan will revert to a standard principal and interest mortgage.

How does a redraw facility work?

A redraw facility attached to your loan allows you to borrow back any additional repayments that you have already paid on your loan. This can be a beneficial feature because, by paying down the principal with additional repayments, you will be charged less interest. However you will still be able to access the extra money when needed.

Savings over

Select a number of years to see how much money you can save with different home loans over time.

e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

How will Real Time Ratings help me find a new home loan?

The home loan market is complex. With almost 4,000 different loans on offer, it’s becoming increasingly difficult to work out which loans work for you.

That’s where Real Time RatingsTM can help. Our system automatically filters out loans that don’t fit your requirements and ranks the remaining loans based on your individual loan requirements and preferences.

Best of all, the ratings are calculated in real time so you know you’re getting the most current information.

Mortgage Calculator, Property Value

An estimate of how much your desired property is worth. 

Mortgage Calculator, Repayments

The money you pay back to your lender at regular intervals. 

What is an ombudsman?

An complaints officer – previously referred to as an ombudsman -looks at formal complaints from customers about their credit providers, and helps to find a fair and independent solution to these problems.

These services are handled by the Australian Financial Complaints Authority, a non-profit government organisation that addresses and resolves financial disputes between customers and financial service providers.