Can You Salary Sacrifice Your Mortgage?

Yes, salary sacrificing can be a way to save money and pay off your mortgage sooner.

The idea of sacrificing your hard-earned dollars may sound as appealing as a Vegemite sandwich to a non-Australian, but if done right, this clever financial manoeuvre could shorten your mortgage journey while reducing your tax bill.

What is salary sacrificing?

Salary sacrificing is an arrangement between you and your employer where you agree to receive a lower salary in exchange for your employer paying for certain benefits or contributions on your behalf. These benefits can include superannuation contributions, salary packaging and mortgage repayments.

Salary sacrificing can be a tax-effective way to reduce your mortgage repayments and save money in the long run. This is because the salary that you sacrifice is not taxed, which means that you pay less income tax.

» MORE: How to calculate mortgage repayments

Who can salary sacrifice mortgage repayments?

Not everyone is eligible to salary sacrifice their mortgage repayments. To be eligible, you must:

Be employed in Australia.
Have a salary-packaging arrangement with your employer.
Have a mortgage with a lender that allows salary sacrificing.

Types of employees who can salary sacrifice mortgage repayments.

Not all employees across industries and companies will be eligible to salary sacrifice their mortgage. Employers who are likely to offer salary sacrifice are usually Fringe Benefit Tax (FBT)-exempt organisations.

Some examples of industries and companies where employees are more likely to be eligible to salary sacrifice their mortgage include:

Public sector (public hospitals, government departments and agencies)
Not-for-profit organisations
Large corporations

» MORE: Types of employment in Australia

How to check if salary sacrificing is an option for you

To check if salary sacrificing is an option for you, you should contact your employer and ask if they offer salary-packaging arrangements. If they do, you should ask if mortgage repayments can be included in your salary-packaging arrangement.

Nerdy Tip: It is a common misconception that your employer’s mandatory superannuation contributions will be reduced if you salary sacrifice. However, your employer is still required to pay your full superannuation guarantee entitlements, regardless of whether you salary sacrifice.

How does salary sacrificing work?

Salary sacrificing works by you agreeing to receive a lower salary in exchange for your employer paying for certain benefits or contributions on your behalf. In the case of salary sacrificing mortgage repayments, your employer would make a direct payment to your lender each month. Salary sacrificing could make a big difference to your mortgage repayments over time.

Rules and restrictions

There are a few rules and restrictions that you need to be aware of when salary sacrificing your mortgage repayments:

You must have a salary packaging arrangement with your employer.
Your employer must agree to pay your mortgage repayments on your behalf.
Your lender must allow salary sacrificing.
The salary that you sacrifice must be used to pay off your mortgage. You cannot use it to pay for something else, such as personal living expenses.

Tax implications

Salary sacrificing mortgage repayments can have tax implications as there are limits imposed on voluntary concessional contributions. You should speak to a tax advisor to get advice on your specific situation.

5 essential steps to salary sacrifice

To salary sacrifice your mortgage, you need to follow these steps:

Speak to your employer and ask if they offer salary-packaging arrangements.
If your employer offers salary-packaging arrangements, ask if mortgage repayments can be included in your arrangement.
If your employer agrees to salary sacrifice your mortgage repayments, you need to contact your lender and let them know.
Your lender will provide you with a form that you need to complete and return to them.
Once you have completed the form and returned it to your lender, your salary-packaging arrangement will be set up.

Should you salary sacrifice your mortgage?

Whether or not you should salary sacrifice your mortgage depends on your individual circumstances. There are a few pros and cons to consider:

Pros

You can save money on your mortgage repayments in the long run.
You can reduce your taxable income.
Your employer will handle all administrative tasks relating to salary sacrificing.

Cons

You will receive a lower salary.
There are restrictions on the maximum allowable contributions you can make to your superannuation fund. Your annual concessional contributions must not exceed $27,500, which encompasses both your salary-sacrificed contributions and the contributions made by your employer under the super guarantee.
It may not be financially advantageous if your annual income falls below $37,000. In the event that your income is below this threshold, you are subject to a tax rate of only 19%. Consequently, engaging in salary sacrifice might not provide significant benefits since it would only result in a 4% reduction in your tax liability.

Alternatives to salary sacrificing your mortgage

If you are not eligible to salary sacrifice your mortgage, or if you do not want to, there are a few other ways to reduce your mortgage repayments, such as:

Making extra mortgage repayments.
Refinancing your mortgage to a lower interest rate.
Using offset accounts with discipline.
Renting out a part of your home.
Rentvesting until you have enough equity to move in.
Downsizing to a smaller property.
Using superannuation to pay your mortgage.

If you are investigating salary sacrifice because you are planning to buy your first home, you might consider participating in the First Home Super Saver Scheme.

Salary sacrificing your mortgage can be a great way to save money and pay off your mortgage sooner. However, it is important to weigh up the pros and cons carefully before making a decision. You should also speak to a financial advisor to get advice on your specific situation.

» MORE: Understanding principal and interest for a home loan