Can you salary sacrifice your mortgage in Australia?

Salary sacrificing, also known as salary packaging, is a popular financial strategy that allows employees to pay for various expenses with pre-tax income. This can provide significant tax benefits and help manage finances more effectively. In Australia, salary sacrificing is commonly used for superannuation contributions, car leases, and other expenses. But can you salary sacrifice your mortgage? This article explores the feasibility, benefits, and drawbacks of salary sacrificing a mortgage in Australia, along with practical considerations and alternative options.

What is Salary Sacrifice?

Salary sacrifice is an arrangement between an employer and an employee where the employee agrees to forego part of their future salary in exchange for benefits of a similar value. This means the sacrificed portion of the salary is paid directly by the employer towards specific expenses before income tax is applied. Common uses of salary sacrifice in Australia include additional superannuation contributions, novated car leases, and various work-related expenses such as laptops and mobile phones. By reducing taxable income, salary sacrifice can result in substantial tax savings, making it an attractive option for many employees.

Can You Salary Sacrifice Your Mortgage in Australia?

In Australia, salary sacrificing a mortgage is possible, but it heavily depends on your employer. Current regulations primarily support salary sacrificing for superannuation, car leases, and certain work-related expenses. While it is technically feasible to salary sacrifice mortgage payments, employers must agree to such an arrangement, and not many employers offer this option. This is mainly because salary sacrificing a mortgage incurs Fringe Benefits Tax (FBT), which is paid by the employer. Employers are unlikely to offer salary sacrificing for mortgage payments unless they an organisation that is exempt from FBT, such as a public hospital, public ambulance service or health promotion charity.

How Much Money Can You Save by Salary Sacrificing Your Mortgage?

The amount you save will depend on your annual salary as well as your mortgage repayments. As an example, we will calculate the savings on an average full-time salary in Australia (approximately $93,000) and the average Australian mortgage repayment of around $3,700 per month ($44,400 per year).

If your employer is a FBT-exempt organisation, they are capped at how much Fringe Benefits they can give, at $30,000 per year for public benevolent institutions and health promotion charities, and $17,000 for hospitals and ambulance services. In the table below, we will show you an example where your employer can offer you $30,000 of mortgage repayments to be salary sacrificed, and the remaining $14,400 per year will need to be paid after tax.

In the example above, the total amount you save after one year of salary sacrificing is $9,000 in your bank account! This is a substantial amount that you can use to pay down more of your mortgage, use for other investments, or simply earn interest in your bank account.

How to Salary Sacrifice Your Mortgage

First, ensure you understand the specific policies and conditions set by your employer, including any administration fees. It is also a good idea to seek advice from a financial advisor or tax professional to explore the feasibility and implications of salary sacrificing your mortgage. They can help you navigate the complex tax rules and ensure that you make an informed decision.

It is also advisable to review your overall financial situation and goals. Consider how salary sacrificing your mortgage fits into your broader financial plan and whether it aligns with your long-term objectives. Also consider alternative strategies to pay off your mortgage which are discussed below.

If you decide to go ahead with salary sacrificing your mortgage, speak to your employer who will guide you through the forms and specific steps to take for your situation.

Benefits of Salary Sacrificing Your Mortgage

The primary advantage and the main reason Australians consider salary sacrificing, is the potential tax savings. By paying your mortgage with pre-tax dollars, your taxable income would be reduced, lowering your overall tax liability. Additionally, reducing mortgage debt faster by using pre-tax income could save on interest payments over the life of the loan, accelerating the path to mortgage freedom.

Another potential benefit could be improving your cash flow. By using pre-tax income for mortgage payments, you might have more disposable income each month. This can provide financial flexibility and the ability to allocate funds to other investments or savings goals. However, it's crucial to balance these potential benefits against the practical and regulatory challenges discussed earlier.

Disadvantages of Salary Sacrificing Your Mortgage

While the idea of salary sacrificing your mortgage might sound appealing, there are some downsides to consider. One important drawback is the impact on your mandatory superannuation contributions. When you salary sacrifice, your gross income is reduced, which means that the base on which your employer calculates your superannuation guarantee contributions is also lower. This results in lower superannuation contributions, potentially affecting your retirement savings in the long run.

Employers that offer the option to salary sacrifice mortgage payments may have strict policies and conditions. There may be administration fees associated with setting up and managing a salary sacrifice arrangement, which reduce the financial benefits of salary sacrificing your mortgage. It is essential to factor in these potential costs when considering this option.

Alternatives to Salary Sacrificing Your Mortgage

Given the challenges associated with salary sacrificing a mortgage, exploring alternative strategies to manage your mortgage more effectively is advisable. One option is to make extra mortgage repayments. By contributing additional payments towards your mortgage, you can reduce the principal faster, saving on interest costs and potentially shortening the loan term. This strategy does not involve complex tax implications and provides straightforward financial benefits.

Another alternative is refinancing your mortgage. Refinancing to a lower interest rate can reduce your monthly repayments and total interest paid over the life of the loan. It can also provide an opportunity to access better loan features and terms that suit your financial situation.

Additionally, using salary sacrifice for superannuation contributions instead of your mortgage repayments can be a powerful strategy. By boosting your superannuation with pre-tax dollars, you can build your retirement savings while benefiting from tax concessions. The savings from reduced tax liability can then be redirected towards your mortgage or other financial goals.

Conclusion

Salary sacrificing your mortgage in Australia is a great way to access tax savings and faster debt reduction, however not many employers offer this option, as they will have to pay substantial Fringe Benefits Tax (FBT) unless they are an FBT-exempt organisation. If you are lucky enough to work for an employer that offers it, you can take advantage of this, otherwise you can explore alternative strategies to reducing your mortgage, such as making extra mortgage repayments, refinancing, or using salary sacrifice for superannuation. All of these are effective ways to manage your mortgage and achieve your financial goals sooner. Consulting with financial professionals or a mortgage broker and carefully considering your options will ensure that you make the best decision for your unique situation.