Navigating the last few years of a volatile economic period has been a challenge for many Australians, leaving them now looking for new ways to save money.
One strategy to help you save on taxes is to salary sacrifice some of your pre-tax income.
A salary sacrifice arrangement allows you to redirect a portion of your pre-tax income into an eligible expense, such as superannuation contributions or mortgage repayments. There are several different expenses you can salary sacrifice, including mortgage repayments, of which many people seem to be unaware.
In this blog post, we’ll explore the benefits of salary sacrificing your mortgage, the pros and cons of this strategy, and why it’s essential to consult a mortgage broker before making a decision.
Whether you’re a first-time homebuyer or a seasoned property owner, understanding the benefits and limitations of salary sacrificing a mortgage can help you make an informed decision that aligns with your financial goals.
Here’s what you need to know about salary sacrifice-mortgage repayment arrangements.
What is Salary Sacrificing?
Salary sacrificing is a way to redirect a portion of your pre-tax salary into an eligible expense. This means that instead of paying tax on that money, you use it to pay for things like superannuation contributions, mortgage repayments, or other approved expenses, such as:
- Superannuation contributions
- Mortgage repayments
- Car loans
- Health insurance
- Childcare expenses
So, essentially, by redirecting your pre-tax salary, you can lower your taxable income, which can result in less income tax.
Example: Income Tax After Salary Sacrifice (Mortgage Expense)
Let’s say you’re a registered nurse earning an annual salary of $85,000. As your employer gets a Fringe Benefits Tax (FBT) rebate (see discussion below), they allow you to salary package your home loan repayments, which amount to $16,200 annually.
Without salary | With salary packaging | |
Salary | $85,000 | $85,000 |
Mortgage repayments | $16,200 | |
Total package (excluding superannuation) | $85,000 | $68,800 |
Less: tax and Medicare levy | $19,792 | $14,203 |
After-tax salary | $65,208 | $54,597 |
Less: mortgage repayments | $16,200 | |
Net cash remaining | $49,008 | $54,597 |
Cash savings with salary packaging: $5,589 | ||
Why Australians Choose Salary Packaging
Many Australians choose to salary package eligible expenses to optimise their finances. As you can see from the hypothetical example above, you can save quite a bit, and this example only included mortgage repayments! You might also choose to package other expenses and potentially benefit from even greater savings.
The Fringe Benefits Tax Consideration
It’s worth noting, however, that your employer has to agree (in writing) to salary sacrifice your mortgage and any other eligible expenses.
Your employer may choose not to offer salary packaging options because they’re likely to have to pay Fringe Benefits Tax (FBT), which is a tax they must pay if they provide you with benefits over and above your salary or wages. There are some FBT exempt employers who can take advantage of certain benefits, such as registered charities, not-for-profit organisations and those in the health sector.
So, you’ll need to discuss whether or not this will be a cost-effective option for both you and your employer.
What are the Advantages and Disadvantages of a Salary Sacrificing Arrangement?
As with any tax strategy, you have to weigh the advantages against the potential drawbacks of the salary sacrifice arrangement when deciding if it will benefit you in light of your personal financial circumstances:
Advantages
- Tax benefits: Salary sacrificing your mortgage allows you to redirect a portion of your pre-tax salary towards your mortgage payments, which can lower your taxable income and result in significant tax savings.
- Increased disposable income: By using pre-tax dollars to pay off your mortgage, you’ll have more disposable income available for other expenses or investments.
- Faster mortgage repayments: With the increased disposable income, you could choose to make higher repayments towards your home loan so that you can pay it off faster and reduce the amount of interest you pay over the life of the loan.
- Convenience: Having your mortgage payments come directly from your salary can make budgeting and managing your finances more manageable.
Potential Drawbacks
- Employer restrictions: Some employers may have limits on what you can salary sacrifice, which can impact your ability to make extra mortgage payments.
- Reduced super contributions: Salary sacrificing your mortgage may lower your income base, and although this can push you back into a lower tax bracket, it can also reduce the mandatory super contributions your employer makes into your super fund.
- Administrative costs: Some employers may charge additional fees to set up salary sacrifice arrangements.
As each of these advantages and disadvantages will play out differently depending on your specific situation, it’s a good idea to consult with a mortgage broker who can help you understand the impact of salary sacrificing on your mortgage and overall financial situation. They can help you make an informed decision that’s right for you.
Key Takeaways
Salary sacrificing is a popular strategy that can help you optimise your finances by redirecting a portion of your pre-tax salary into an eligible expense, such as superannuation contributions or mortgage repayments.
If you’re considering salary sacrificing your mortgage but are unsure whether it’s the right decision for you, you should discuss your options with a qualified mortgage broker. At The Mortgage Agency, our team of experienced brokers can help you understand the benefits and drawbacks of salary sacrificing and provide personalised advice that aligns with your financial goals.
In addition to providing guidance on salary sacrificing, The Mortgage Agency also offers a wide range of other services to help you achieve your homeownership goals. Whether you’re a first-time homebuyer, looking to refinance or invest in property, our brokers have the expertise to guide you through the process and find the right loan for your needs.
We can help you with;
- Home loans
- Investment loans
- Refinancing
- And much more
To learn more about the services we offer, visit our website and schedule a free consultation with one of our brokers today. With our expert advice and guidance, you can feel confident making an informed decision about salary sacrificing your mortgage.
