5 things you need to know before salary sacrificing into your mortgage

But before you jump in, let's explore what salary sacrificing your mortgage really means, its benefits, and the possible downsides.

If you’re employed by a not-for-profit, a hospital or healthcare service, or a publicly-funded institution, you might be able to make the most of a vast suite of salary sacrificing ‘fringe benefits’. 

One such benefit could allow homeowners to salary sacrifice towards their mortgage, thereby helping them to avoid tax while meeting their regular home loan commitments.

But what does salary sacrificing mean? And are there downsides to salary sacrificing into a home loan?

Let’s explore the phenomenon so you can make the right decision for your financial situation. 

But first: What is salary sacrificing?

Salary sacrificing, also known as salary packaging or total remuneration packaging, sees an employee foregoing part of their pre-tax salary in exchange for benefits of a equal or similar value. 

So, you’re essentially letting your employer pay for something with your pre-tax income that you would have otherwise bought with your post-tax income. As you won’t be receiving the sacrificed portion of your salary in cash, it won't be considered taxable income and won’t be subject to income tax.

All Australian workers can salary sacrifice into their superannuation fund – boosting its value while potentially minimising tax payable on the money sacrificed. Though, they won’t be able to access that money until they reach retirement age (except for in specific circumstances, one of which we’ll get to shortly), and superannuation contributions are still taxed, but at a low rate of 15%. 

If you work for an employer that offers broader salary sacrificing, however, you might find it offers numerous ‘fringe benefits’.

Such fringe benefits might include the provision of:

• A car and payment of its expenses 

• A novated lease 

• Payments towards costs like childcare costs or rent

• Payments towards loan repayments – including mortgage repayments

Employees who work in the public or healthcare sector or for large corporations, charities, not-for-profits, or religious organisations might be able to make use of such fringe benefits.

An employer that provides these salary sacrificing options will likely need to pay fringe benefits tax (FBT) on their cost. Though, many organisations – such as public benevolent institutions, certain charities, and public hospitals – are eligible for FBT exemptions. 

If your employer is exempt from FBT, it will be limited by how much it can allow an employee to salary sacrifice each year. If it surpasses these limits, it will need to pay FBT on the excess. 

1. What does it mean to salary sacrifice into your mortgage?

If an employer offers the option to salary sacrifice into an employee’s home loan, and that employee takes them up on it, the employer will begin to pay a portion of a person’s mortgage commitment.

The employee won’t pay income tax on the salary sacrificed funds that are used to pay their home loan repayments. 

Though, they might need to top up their repayments out of their take-home pay, as they might not be able to salary sacrifice the entire value of their repayments.

Importantly, you can only salary sacrifice towards the repayments on an owner-occupier home loan. Loan repayments for an investment property aren’t eligible.

Further, only a person’s actual home loan repayments can typically be paid using salary sacrificed funds. Those funds can’t go into an offset account, for instance. 

2. What are the benefits of salary sacrificing into a home loan?

There are two major benefits of salary sacrificing towards mortgage repayments:

1. A portion of your home loan repayments will be paid using specifically earmarked funds
   This might help ease the perceived burden of mortgage repayments.

2. It will save you in income tax
   For instance, if your annual pre-tax income is between $55,000 and $135,000 and you salary sacrifice $10,000 per year towards your mortgage, you’ll probably save around $3,000 in income tax each year.

Of course, you might also take the money you save in income tax and use it to make extra repayments. 

That could save you a considerable amount of interest per year and shorten the life of your home loan substantially. 

3. What to consider before salary sacrificing your mortgage repayments

Salary sacrificing towards mortgage repayments can be financially advantageous, but there are still a few things that a person considering doing so should be aware of.

There are generally administrative fees associated with salary sacrificing and they should be considered.

However, perhaps the most impactful factor to consider is that salary sacrificing can affect other aspects of your taxation.

If you have a HECS-HELP debt, for instance, your employer might take your post-salary sacrifice income into consideration when calculating how much of your pay to set aside for your study loan repayments. The ATO, on the other hand, will consider your pre-salary sacrificing income when it determines how much you need to repay in a given financial year.

That means you could be left with a bill at the end of each financial year unless you ask your employer to set aside more dosh on your behalf than it otherwise might.

According to the ATO, entering into a salary sacrificing arrangement might also impact certain other tax offsets, child support payments, and some government benefits.

However, the myth that salary sacrificing will see your employer paying you less super is just that – a myth. As per the ATO, your employer must provide your superannuation guarantee entitlements as if you don’t have a salary sacrificing arrangement in place. 

If you’re unsure whether you could be negatively impacted by salary sacrificing, it might be worth reaching out to a taxation professional for advice. 

4. Could salary sacrificing impact your home loan application?

If you don’t own a home just yet or you’re considering taking out a new mortgage and you’re particularly unlucky, your existing salary sacrificing activities could hold you back.

That’s because some lenders prefer to look at your take home pay, rather than your pre-tax salary, when they consider you as a potential home loan candidate. 

If the person assessing your application doesn’t understand how salary sacrificing works – or simply can’t comprehend the often-complex payslips a person who is salary sacrifice receives – they mightn’t realise the breadth of your income. Thus, they might not realise that you’re capable of servicing the repayments on the mortgage you’re applying for.

For that reason, you might want to be prepared to answer questions and provide additional information regarding your salary sacrificing activities. 

Further, some lenders could have policies in place that make them not very salary sacrificing-friendly. Fortunately, lenders’ customer service teams are typically well versed in such policies and happy to answer questions from prospective borrowers.

If all this sounds too much, you could turn to a mortgage broker for help. Mortgage brokers exist to help hopeful-borrowers find a suitable home loan. Though, they generally don’t have access to the entirety of the market and so, mightn’t be able to offer the best deal available. 

5. What if your employer doesn’t allow for salary sacrificing?

If your employer doesn’t offer salary sacrificing, you’re not alone. Many businesses don’t provide salary sacrificing options as doing so would mean they pay FBT. 

Further, just because an employer provides salary sacrificing arrangements, doesn’t necessarily mean it will offer the option to salary sacrifice into a mortgage.

Unfortunately, if your employer doesn't offer the option to salary sacrifice into your mortgage, you won't be able to bypass them. You'll simply have to make your home loan repayments the traditional way.

Though, if your workplace doesn’t offer salary sacrificing (or you want to minimise your tax further) and you haven't owned a home before, there is one way you can set aside a portion of your pre-tax income to go towards homeownership:

First Home Super Saver Scheme 

If you’ve never owned property before, you might be able to make the most of the First Home Super Saver Scheme (FHSSS).

The FHSSS allows first-time buyers to withdraw voluntary contributions made to their superannuation account.

As mentioned above, salary sacrificed superannuation contributions are taxed at a rate of 15% – lower than any income tax bracket. 

That amount able to be withdrawn through the scheme is limited to $15,000 made within any one financial year (plus associated earnings), up to a maximum of $50,000 of contributions made over many years (plus associated earnings). 

Once the funds are withdrawn, that money must go towards the purchase of a property.

‘Associated earnings’ are calculated using a figure known as the ‘shortfall interest charge rate’. From July 2024 to September 2024, that rate is 7.36% p.a. – which is far higher than the interest rate offered on any savings account product available on the market in the same period.

All that means a first home buyer can salary sacrifice into their superfund to save their deposit and minimise tax in the meantime, all while receiving a potentially decent return on those funds.

Any Australian first home buyer can make the most of the scheme, whether their employer offers salary sacrificing or not.

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