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.

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