Salary Sacrifice To Mortgage: How It Works, Pros & Cons, and More

A salary sacrifice to mortgage means paying off your monthly mortgage repayments directly from your pre-tax income. Although this reduces your monthly in-hand pay, it opens excellent tax and interest-related benefits.

Mortgages are usually a headache for many homeowners. Although it does grant you the benefit of owning a house, the hefty monthly repayments often weigh you down.

Thankfully, there are many money-saving opportunities for homeowners in Australia. Salary sacrifice is one of them.

Today, we’ll explore the concept of salary sacrifice in great depth, how it works for mortgages, the benefits, and more.

Salary Sacrifice to Mortgage: How Does It Work?

First and foremost, we need to understand salary sacrifice in its entirety.

Salary sacrifice is an arrangement where part of an employee’s pre-tax income is directly used for specific expenses, ultimately reducing their taxable income.

Now, here’s how it ties up with mortgage…

When you salary sacrifice to mortgage, you will basically arrange for your employer to directly send a part of your pre-tax income (as set by you) to your lender as your monthly mortgage repayment.

This way, you’ll repay on time while reducing your taxable income since a part of your income is already used to pay off your repayment before you get your take-home salary.

The Benefits of Salary Sacrifice for Your Mortgage

There are significant benefits when you salary sacrifice to mortgage, especially in terms of your finances. Let’s take a closer look at them.

• Tax reduction: When you repay your mortgage by salary sacrificing, your final, take-home, taxable income is reduced. Since tax is calculated on this reduced income, you may fall into a lower tax bracket, bringing down your income tax.

• Pay off the mortgage faster: Salary sacrifice ensures on-time mortgage repayments. Couple that with tax savings; you’re left with more money saved that you can use to make extra repayments, which shortens the loan term.

• Lower mortgage interest over time: By paying off your mortgage on time with extra repayments, your overall loan balance comes down faster. This reduces your payable interest over time.

Are you looking for a new home loan? Koalify is one of the top online mortgage brokers in Australia that you can consult with for expert guidance, personalised solutions, and competitive rates.

Just share some basic details, and we can help you get your dream home through an easy and stress-free process. Contact us now!

Potential Drawbacks of Salary Sacrificing Your Mortgage

Salary sacrifice also has its own set of drawbacks:

• Impact on disposable income: You’re ultimately reducing your take-home pay when you salary sacrifice. Take into account that this could affect your lifestyle and daily expenses.

• Restrictions on salary sacrifice agreements: Not all employers in Australia offer salary sacrifice arrangements for mortgage payments. Likewise, not all lenders may accept pre-tax contributions.

What if Your Employer Doesn’t Have Salary Sacrifice Arrangements?

Many businesses in Australia do not provide salary sacrifice arrangements since they may be liable to pay Fringe Benefits Tax (FBT) unless they’re exempt from it.

And even if an employer does provide it, they may not necessarily offer the option to salary sacrifice to your mortgage.

That said, if your employer doesn’t offer this opportunity, consider yourself unlucky since there’s no way you can bypass that.

However, there are alternatives you can explore. We’ll cover that further down.

Does Salary Sacrifice Affect Your Home Loan Application?

Yes, it might. Because some lenders prefer looking at your take-home pay rather than pre-tax income.

It’s also possible the person reviewing your application:

• Do not necessarily know about salary sacrifice. 

• Or they simply cannot comprehend the often complex payslips a person who salary sacrifice receives.

In such cases, they may fail to figure out your overall income, concluding that you may not be capable of affording a home loan. 

Alternatives to Salary Sacrifice for Mortgage Payments

If you can’t arrange a salary sacrifice to your mortgage for some reason, these are the best alternatives to consider.

Make Extra Voluntary Payments

The first option is to make extra voluntary payments to your mortgage from your take-home income. 

However, this increases your taxable income, meaning you pay more in income tax than you would have if you had salary sacrificed.

Offset Accounts

This alternative can help you reduce your mortgage interest rate and pay it off faster if used wisely.

An offset account is an everyday transaction account linked to your home loan balance. The amount of money in this account is basically offset against your home loan balance, reducing your tax payable.

For instance, if you have a home loan balance of $300,000 and $50,000 in your offset account, you’re only charged interest on the offset amount, which is $250,000 ($300,000 - $50,000).

And since your offset account is an everyday transaction account, the money in it is still accessible whenever you want it. All the while, it also works to reduce your overall payable interest.

So, if you deposit your salary and savings into an offset account, you could benefit immensely with savings on interest!

Redraw Facility

Some lenders offer redraw facilities in their home loan offers.

It’s a feature that lets you make extra voluntary payments on top of your minimum monthly repayments. This additional money you pay can be taken back if you need it in the future.

And like offset accounts, the extra money you pay is calculated against your home loan balance, helping you reduce your overall interest payable.

It’s a flexible option for reducing your interest payable and paying down your mortgage quickly while still having the security of accessing funds in case of an emergency.

Refinancing

Refinancing means replacing your current loan with a new one that has lower interest rates, better terms, or similar benefits.

You could do this either with your current lender or a new one.

The most common reason for refinancing is to benefit from lower interest rates. And banks tend to offer better rates to new customers than existing ones, so homeowners usually get the advantage of better interest rates when they refinance with a new lender.

If you’re already paying a mortgage and want some savings with better terms, we can help you find the best possible refinancing offers tailored to your requirements.

Koalify partners with 30+ top lenders in Australia, helping you find a lender, offer, and terms that fit your needs. We have saved our customers thousands of dollars, all without a single fee.

Contact us today to see how much you could save!

Salary Sacrifice to Mortgage: Is It Right for You?

This entirely depends on your individual situation. 

First, assess your current expenses. If you have expenses or liabilities other than your mortgage repayments, calculate how much that adds up to. Make sure your final take-home salary can cover all your monthly expenses even after your mortgage payment is cut. 

Another important thing to remember is the income tax bracket you fall into. If your primary goal with salary sacrifice is to save on tax, it will only make sense if you’re earning a high income.

The benefits are generally more significant if you’re in a higher tax bracket. This is because a higher marginal tax rate means a larger portion of your income is taxed, so redirecting a portion of that pre-tax income toward your mortgage can result in noticeable tax savings.

However, if you’re in a lower tax bracket, the savings might be minimal, and you may find other ways to manage your finances more effectively.

Compare rates from multiple lenders

Let our home loan experts secure the most suitable deal for you

I want to refinanceI want to buy a home