April 26, 2018
Being able to salary sacrifice your mortgage is a great way to reduce your taxable income and put more money in your pocket. Use the money you save to get ahead on your mortgage and you’ll benefit even further by reducing the amount of interest you’ll pay overall and eliminating your mortgage altogether faster.
If salary sacrificing is so advantageous, why isn’t everyone doing it?
Here’s the catch. You have to work for what is known as a Rebatable Employer – generally, not-for-profits and charitable organisations are considered rebatable.’ Not only that, your employer has to offer this benefit.
Take a look at how the process works and what’s involved. If you do find that you are eligible, you may want to take the steps to set up salary sacrificing for your mortgage.
Salary sacrificing, also known as salary packaging, is a way to reduce the amount of taxes you pay each year. It involves agreeing with your employer to receive a smaller salary in exchange for receiving certain tax-free benefits from your employer.
You’ve probably already heard of salary sacrificing for super – where you sacrifice some of your pre-tax income to increase your super contributions. But, there’s a lot more that can technically be packaged’, like work tools, a car loan, and child care. The reality is, most employers don’t offer a variety of salary packaging options. For many employers, they have to pay fringe benefits tax on any benefits you receive over $2,000. Also, many assume the process is simply too complex and so don’t bother.
A salary sacrifice for a mortgage is one of the most attractive benefits because of the amount of money you could potentially save. For example, if you make $80,000 a year and reduce your taxable income by $10,000 as a sacrifice for your mortgage, you’ll only owe tax on $70,000. Depending on the other details of your income tax, this could easily save you over $3,000 a year.
If your employer does let you package part of your mortgage, they will have set limits on how much you can sacrifice. Be sure to ask what those limits are.
To be eligible, first, you have to work for a Rebatable Employer. If you work for one of the following types of organisations, you can ask if they offer salary sacrificing for home loans:
- Public or private hospital
- Non-government charitable organisation
- Not-for-profit organisation
Not any employee of a not-for-profit or hospital is going to be able to take advantage of salary packaging their home loan. One of the primary restrictions is that the employer must be willing to do it, and some are not.
If you are an employee of an NFP or other eligible organisation that does offer salary packaging for home loans, now you have to see if you qualify as a borrower:
- You have to be an owner-occupier
- You need to ask your lender if they allow salary sacrificing
Not all lenders will let you salary sacrifice your mortgage payments. If you are taking out a loan, make sure you find out which lenders will let you when you are comparing lenders. If your current lender doesn’t let you, this may be one more good reason to refinance.
There are a few reasons why you might want to salary sacrifice your mortgage. The biggest is that the money is considered pre-tax, which means that you do not pay any taxes on it. This reduces the amount of tax you have each year by the amount of money going toward your mortgage.
A second benefit is that you will be able to pay off your house sooner. Because your taxes are lower, more money is put into your pocket. If you put some or all of that extra money into paying off the mortgage ahead of time, you’ll become debt free faster.
It’s also convenient. When your income goes straight towards paying down your mortgage, you don’t have to worry about making payments on time. It’s already done for you. This can also take some of the stress out of looking at a huge mortgage bill each month.
A regular employer will have to pay taxes on employee benefits that are valued at more than $2,000, with some exceptions. The ATO gives not-for-profits a tax break on fringe benefits; they still have to pay fringe benefits tax, but the limits on what they can provide before being taxed at the normal rate are much higher.
This makes it a lot easier for your employer to offer the benefit. What do they have to gain? You!
Not-for-profits and other eligible organisations who offer home loan packaging can attract and keep better employees. This can give them an advantage to help compete with private sector employers, who may be able to attract skilled workers with a higher salary. With salary sacrificing, you gain more income indirectly through a tax break.
Is it harder to get a home loan if you salary sacrifice? After all, your reported income looks smaller, doesn’t it?
Because salary packaging has been around for some time now, most lenders will take into consideration the income difference. They can just add the amount that is sacrificed to your income to see what you are really making.
If you are refinancing or shopping for a home loan, make sure you talk to your mortgage broker about this. They can help you find a lender who will pay attention to your total income, not just your income after any salary packaging. They can also help you find a lender who will let you salary package your home loan in the first place.
Take your time to shop around and research the different home loans on offer so you can get the most out of your money. With the right loan and by taking advantage of the salary sacrificing that is available to you, you can take better control of your financial future.
Written by Refinancing.com.au
Refinancing.com.au is an end-to-end service that helps people refinance their home loan. We empower you to search for your home loan, and choose the process that suits you.
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