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Can you salary sacrifice your mortgage?
You can use salary sacrifice to pay off your mortgage with pre-tax income and reduce your tax bill. But it's only an option if you work for a non-profit organisation with a fringe benefits tax exemption.
You can salary sacrifice your mortgage repayments if your employer allows it. This means your take-home salary shrinks, but so does the amount of tax you pay. It's a cost-effective benefit but one that most employers can't offer because they have to pay fringe benefit tax (FBT) on the repayments.
Salary sacrificing for your mortgage repayments is mostly available to people who work for FBT-exempt not-for-profit organisations, like hospitals or certain charities.
How salary sacrificing your mortgage repayments works
Under a home loan salary sacrificing arrangement, your employer pays off your monthly mortgage repayment directly from your pre-tax income. This means your monthly paycheque will be smaller.
And at tax time, you'll pay less tax. That's a pretty good deal. The catch, unfortunately, is most employers don't offer this benefit because they have to pay tax on the benefit instead.
Home loan salary sacrifice – example
Your annual salary is $90,000 before tax, or $7,500 a month.
Your mortgage repayment is $1,200 a month ($14,400 annually).
Your employer offers to pay your $1,200 monthly repayments and reduces your monthly salary to $6,300 a month before tax.
Your taxable income has shrunk from $90,000 to $75,600.
Instead of paying $21,517 in taxes (including the Medicare levy) your tax bill shrinks to $16,549.
You save $4,968 in taxes.
FBT costs
In the above example the employer would have to pay the FBT on the $14,400 mortgage repayment benefit.
The ATO calculates FBT by multiplying the value of the benefit at 1.8868.
1.8868 x 14,400 = $27,169.92
And then this amount is taxed at 47%, equalling a tax obligation of $12,770 to the employer. This is why salary sacrificing for an employee's mortgage repayments is really only offered by organisations with FBT-exempt status.
You can salary sacrifice your mortgage repayments if:
Your employer offers this benefit to employees.
Your employer is an FBT-exempt organisation (a public hospital, charity or non-profit).
Your lender accepts salary sacrifice payments on your mortgage (if it doesn't you could refinance your home loan).
If you want to find out whether you can salary sacrifice your home loan repayments you just need to ask your employer.
If you need expert guidance on your mortgage or taxes, it's worth speaking to a mortgage broker or an accountant.
Is salary sacrifice a fringe benefit?
Some forms of salary sacrifice arrangements are considered fringe benefits by the ATO. This includes benefits like cars, shares or other goods. It also includes loan repayments or other payments like school fees.
Work-related items such as protective gear, software or computers are exempt from FBT.
Superannuation is not considered a fringe benefit. According to the ATO super contributions under salary sacrifice arrangements "are considered employer contributions. These are not fringe benefits if the contributions are made to a complying super fund."
Which organisations are FBT exempt?
Not-for-profit organisations may qualify for FBT-exempt status. According to the ATO the following types of organisations are exempt:
Public benevolent institutions (charities whose work relates to poverty, sickness or disability).
Health promotion charities (registered by the Australian Charities Commission and endorsed by the ATO).
Public and not-for-profit hospitals.
Public ambulance services.
FBT exemption thresholds
There are thresholds for FBT exemptions. The total value of the benefits offered can't exceed $17,000 for hospitals and ambulances or $30,000 for public benevolent institutions and health promotion charities.
These thresholds are for the "grossed up value" of the fringe benefits. That's the dollar amount of the benefit you receive, multiplied by 1.8868.
What about the First Home Super Saver Scheme?
Under the First Home Super Saver Scheme first home buyers can salary sacrifice some of their income into their superannuation to be used as a deposit for a home.
You can make extra contributions to your super, get taxed at the lower rate of 15% and then withdraw the money to form part of your deposit.
While this is a form of salary sacrificing it is different to the mortgage repayment arrangement outlined on this page.
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Frequently asked questions about home loan salary sacrifice
Depending on your employer, you may be able to use salary sacrifice to pay off your home loan. If you work for a public or private hospital, a non-government organisation or a not-for-profit organisation such as a charity, you may be eligible to salary sacrifice your mortgage.
Ask your employer if the company is willing to support salary sacrificing, and check with the Australian Taxation Office to make sure you're eligible to salary sacrifice your home loan. This option is typically only available to owner-occupiers, not to those paying off an investment property.
Next, you'll need to check if your lender will accept salary sacrifice payments on your mortgage. Some banks will simply refuse salary sacrifice repayments outright, so you may need to shop around for a suitable lender. Shopping around is simple to do when you're only thinking about applying for a home loan, but you will need to look into refinancing your existing loan if you already have a mortgage.
A salary sacrifice arrangement is worth considering if you earn a high income because you can enjoy significant tax benefits by reducing your taxable income. If you're in any doubt about whether this option could work for you, ask your accountant for advice.
The Government announced in its 2017 budget that first home buyers will be able to salary sacrifice some of their income into their superannuation to be used as a deposit for a home. This is called the First Home Super Saver Scheme.
The scheme will work by allowing first home buyers to make voluntary contributions into their super up to a maximum of $30,000, with a yearly cap of $15,000. Contributions made through this scheme will be taxed at only 15%, so those using it can save on tax.
Note that under this scheme first home buyers will not be able to withdraw their non-scheme super contributions to pay for their home.
If you're eligible to salary sacrifice your home loan, this sort of arrangement can have several benefits.
You pay less tax. Since a portion of your pre-tax income will be paid straight from your employer to your lender, you will be earning a reduced income as far as the tax office is concerned. This means that you will pay less income tax each financial year.
Save on interest. Paying your mortgage from your pre-tax income means you have more money to put towards your repayments. As a result, you can get on top of your loan sooner and minimise the amount of interest you need to pay over the life of the mortgage. In other words, you'll be able to pay the loan off and take ownership of your home sooner.
More disposable income. Instead of dipping into your own pocket to make loan repayments, you can spend the income you receive as you wish. You could use it to go on a holiday or save for the future. You might even opt to put it towards extra repayments on your loan.
Convenient. A salary sacrifice arrangement means your loan repayments come directly from your pay, which often means setting up a direct debit arrangement between your employer and your lender. This can remove some of the stress from the loan repayment process and help you pay off your loan without you even realising that you're doing it.
Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification. See full bio
Richard's expertise
Richard has written 532 Finder guides across topics including:
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