Salary sacrificing (or salary packaging) is when you and your employer put a chunk of your pay toward other expenses before your tax comes out.
It’s a simple and effective way to lower your taxable income.
Here’s the quick maths:
- Less taxable income = paying less tax.
- Paying less tax = increasing your take home pay.
We know, it sounds like a cheeky loophole. But it’s a completely legitimate and savvy strategy to save money (if your employer offers it).
So, can you salary sacrifice your home loan?
How does it work? (providers like Smart make it simple).
And how do you find out if you’re eligible? (read on).
What is salary sacrificing your home loan?
You’ve probably heard about salary sacrificing your super, but you might not know you can set up a similar arrangement for things like your car, childcare, electronic devices and – you guessed it – your home loan.
In a nutshell, salary sacrificing lets you use some of your pay for certain items before tax is calculated. As a result, you could pay less tax and end up with more money in your pocket. Cha-ching.
Now let’s talk about how it works.
How does salary sacrificing your mortgage work?
In most cases, when you get paid by an employer your tax has already been taken out. Then you’ll pay for all your expenses, like a car or home loan, with what’s left (AKA your take-home pay).
By salary packaging your mortgage, you can pay off your home BEFORE tax comes out, lowering your taxable income and the amount of tax you pay. Yes, please!
But there’s a catch: your employer has to offer it. It’s a three way agreement between you, your employer and a third party, so it has to be an option in your workplace (check your employer’s eligibility here).
A mortgage broker (that’s us!) will understand the ins and outs of salary packaging and home loans so we can help determine how it fits into your bigger financial picture and home loan goals.
Ok, but how do I know if I’m eligible to salary sacrifice my home loan?
Unlike salary sacrificing your super, salary sacrificing your home loan is often only available in specific industries, like, not for profits, healthcare, education and some community service organisations..
Not sure if your workplace offers it? Explore the industries that commonly provide salary packaging, then search for your employer in the Smart database to see what’s available. You might be surprised to learn your employer already offers it for your home loan – and if they don’t you can put forward the benefits and recommend a trusted third-party provider, like Smart.
Smart has more than 25 years’ experience helping their clients’ employees save, across all industries – from corporates, construction, mining and SMEs to government, health, education and not-for-profits.
Let’s look at salary sacrificing your home loan in practice
Take Alex, for example. Alex earns $100,000 a year working for a not-for-profit within the disability sector. Let’s look at the difference between salary packaging and not.
Alex’s mortgage reality (without salary packing)
Based on her $100,000k salary, Alex will pay about $22,788 in income tax and Medicare levy, leaving her with a take-home pay of $77,212.
From this, she’ll cover her mortgage repayments of $30,000 a year, leaving her with $47,212 to live on for all other expenses and savings.
Alex’s mortgage reality (with salary packaging in place)
Alex’s employer is a Smart provider and agrees to salary package $18,550 of her $100,000k salary. $15,900 will go into her mortgage and $2,650 will go toward meals and entertainment. This simple switch reduces her taxable income to $81,450, cutting her income tax bill to about $15,223.
Her mortgage is still $30,000 annually, but now $15,900 is covered pre-tax. So she only needs to pay $14,100 from her after-tax salary. After covering that reduced mortgage amount, Alex is left with $53,148 to live on.
That’s an extra $5,936 per year
As you can see, Alex’s disposable income (AKA income remaining to spend as she pleases) varies significantly depending on whether she chooses to salary sacrifice.
💰 Without salary packaging: $47,212 disposable income.
💰 With salary packaging: $53,148 disposable income.
That’s an extra $5,936 a year, or around $228 every fortnight, without Alex needing to earn a higher salary. Put another way, salary packaging makes her feel like she’s earning $108,729 a year, even though her salary remains $100,000.
Keen to see what it might look like for your specific situation? With Smart’s Salary Packaging Calculator, just enter in your details and see how much you could increase your disposable income.
Benefits of salary sacrificing your home loan
There’s a lot to love about salary sacrificing.
- Reduce your taxable income (if you’re in a similar situation to Alex, you could save as much as $5,936 per year).
- Save money in the long run. Paying less tax means more money in your back pocket.
- Easily pay off your home loan. It’ll be deducted before you even have to think about it.
- Help you pay off your home loan, sooner. Paying less tax can help you save thousands each year – savings which could be funnelled directly toward your mortgage.
- Give you convenience and predictability. Your employer will pay the bank directly through automated repayments. That can make budgeting easier and reduce the temptation to spend money elsewhere.
Learn more about the benefits of salary sacrificing by industry.
Are there any downsides?
As you can see, salary sacrificing your home loan comes with some big benefits (savings). But there are a few downsides.
- Not everyone can do it. Yep, you can only reap the benefits of salary packaging if your employer offers it (usually specific industries like not for profits, healthcare, education and some community service organisations). But hey, it’s worth finding out.
- Lower reportable income. By reducing your “official” taxable income, your reportable income may look lower. This could affect some of your other goals – like loan borrowing capacity, HECS/HELP repayments, child support, or other income-tested benefits. If you want to weigh up how salary sacrificing will impact your borrowing capacity, chat to your mortgage broker.
How do lenders treat salary sacrificing when assessing home loan applications?
As you can see, salary sacrificing can lead to big savings (thousands each year). But a lower taxable income can also reduce your borrowing power.
For these reasons, salary sacrificing can impact how a lender views your home loan application, with an approach that varies from lender to lender.
So whether you already have a home loan or you’re still in the buying stage, understanding how your salary packaging is assessed is key — and this is where speaking with a broker really helps. At Finspo, we know how different lenders view these nuances and can point you toward the ones that align best with your situation.
Ready to set up salary packaging?
First, find out if your employer offers salary packaging for your home loan. If they do (great!) It’s usually quick and easy to set up because the process is already in place.
If they don’t, why not start the conversation? Explain the benefits of salary sacrificing and how it could work for them and their staff. You can even go one step further and send your employer details – point to a provider like Smart who offer employees all the financial benefits of salary packaging (without the hassle).
If you’re still not sure whether salary sacrificing is right for your situation, a Finspo mortgage broker can guide you through the process and help find the right solution (and lender) for your situation.
Chat with a friendly Finspo Mortgage Broker today for free.
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