5 things you need to know about the salary sacrificing your mortgage
Salary sacrifice can be a profitable way to pay off your mortgage, but there are limits to who can take advantage of this benefit and how much they can access. Your mortgage answers five of the most common salary questions people ask about sacrificing their mortgage.
How does the wage sacrifice work?
Salary sacrifice, also referred to by the Australian Taxation Office (ATO) as salary wrap or total compensation wrap, is an agreement between you and your employer that allows you to use part of your pay before tax to pay for certain expenses. These expenses can include your super contributions, mortgage payments, car loans, child care expenses, and health insurance.
Using your pre-tax salary to cover these expenses will allow you to minimize your taxable income because when it comes to the ATO, you earn less. This means that you will also pay less tax. However, your employer may be required to pay employee benefits tax (FBT), which is often paid for the benefits its employees receive. This is the reason why you need your employer’s approval for this kind of arrangement. Certain sectors – including public and private hospitals, nonprofits, and charities – are eligible for an FBT exemption or discount, making the wage benefits more cost effective to implement.
If you are a first-time home buyer, you can also sacrifice a portion of your salary in your retirement pension that you can use as a security deposit under the First Home Super Saver program. Under this plan, you can make contributions to your super up to $ 15,000 per fiscal year and $ 30,000 in total. Super contributions not covered by this plan, however, cannot be withdrawn and used to pay for your home.
What are the benefits of a salary sacrificing your mortgage?
When you enter into a wage sacrifice agreement for your mortgage with your employer, a portion of your pre-tax income will go directly to your lender. It will seem like you are earning less income, which means you will also pay less income tax each year.
The money you can save can be spent on other expenses or you can use it to make additional mortgage payments, which allows you to pay off your loan faster and reduce the amount of your interest payments on your mortgage. the term of the mortgage.
And because loan payments are sent directly to your lender, you don’t have to go through the monthly repayment process personally, minimizing stress and freeing up time for other important activities.
What are the downsides of salary sacrificing your mortgage?
However, the salary sacrificing your home loan also presents potential pitfalls. Once the agreement is in place, you will no longer have access to your sacrificed salary as it will be automatically deducted from your pre-tax salary and paid directly to your lender.
The wage sacrifice also reduces the amount of retirement pension your employer is required to pay, so it is advisable to assess the potential impact of the agreement on your retirement savings. Your salary-related benefits may also change, including time off and overtime, as you will earn less income. You will need to speak and negotiate with your employer if you want these benefits to be protected.
Does the salary sacrifice have an impact on your mortgage application?
Salary sacrifices can affect how much you can borrow, according to Desiree Pasic, financial broker at Bee Financial Savvy.
“If you are applying for a home loan, lenders may view your wage sacrifices as an expense,” she said in an explanatory video. “It can drastically reduce the amount they’ll let you borrow. “
Pasic noted, however, that it depends on whether the lender views your sacrificed salary as voluntary.
“For example, if you use the wage sacrifice to pay the car payments, you can’t just stop paying that. A lender will consider this an expense, ”she said. “But what if you chose to use your pre-tax paycheck to make additional contributions to your super?” Can you stop these payments at any time? Then they will be considered as volunteers. They will not be counted as an expense and will not affect your borrowing capacity.
Is salary sacrificing your mortgage payments a good idea?
Not all companies allow wage sacrifices and for those that do, they may have different policies. If you are considering sacrificing your salary for your mortgage, it is best to check with your human resources department to see what options you have and with the ATO to make sure you qualify for the benefit.
If your employer accepts this arrangement, it should be written into a formal contract. This should include the terms of the wage sacrifice, the amount, and details of how the mortgage payments will be made.
Another important thing to note is that this option is often only available if you are purchasing an owner-occupied home and not an investment property. Some banks also don’t accept payroll sacrifice refunds, so it’s best to check to see if your lender allows this arrangement. Your accountant and mortgage broker can help you determine how much you can save by sacrificing your salary to pay off your loan and whether the move is worth it in the long run.