It isn’t easy to save money on your mortgage when interest rates are on the increase, but there is a way. Depending on the Fringe Benefits Tax (FBT) status of your employer, you can maximise your earnings and take the sting out of your home loan interest at the same time. While popular salary packaging strategies tend to direct people to cars, laptops or living expenses, you may be able to use your pre-tax income to pay your mortgage. This could also leave you with more disposable income to invest in other things or put towards more of what you enjoy. So the first things to do is check your employer’s FBT status and confirm they allow to salary package.
How does salary packaging your mortgage work?
Because salary packaging enables you to use your pre-tax income, your mortgage repayments are effectively tax-free. This is a way of indirectly yet effectively getting a discount off your loan. As the deductions are from pre-tax, it doesn’t matter which tax bracket you are in, you will see a benefit. If you want to set up your mortgage for salary packaging, the steps are fairly straightforward and easy. While the ability to do this will depend on your employer’s FBT status, it is a simple process to set up through your salary packaging provider. There’s not many ways you can save on your mortgage and legitimately minimise the tax you pay.
Pay your loan down faster
Salary packaging your mortgage can help you reduce the duration of your loan term. Because you are able to potentially increase the amount of your repayments without feeling the extra pinch, you have the ability to pay down your loan faster. Paying your loan down in a shorter period can potentially save you thousands of dollars in interest. To calculate how much you can save on a weekly or monthly basis, as well as over the entire term of your loan, you can get in touch with your salary packaging provider.
Another benefit is that your mortgage payments can be made in line with your pay cycle rather than on a monthly basis. This means that if you are paid every fortnight, your mortgage repayments can move to fortnightly as well, saving you even more interest and potentially years off your loan term.
Even though salary packaging has been around for many years, unfortunately not all lenders understand the positive cash impact of salary packaging home loan repayments. If your lender doesn’t, it may even be worth making the switch or refinancing with one that does so you can start maximising those hard-earned dollars. In any case, we recommend consulting an independent financial advisor for personalised advice.
Increase your take home pay
When you salary package your home loan, you’ll be making repayments on your mortgage from pre-tax dollars. Because this reduces your amount of taxable income each pay cycle, the tax office can’t take as big a chunk. This means you can put more towards your mortgage and will have more disposable income after your mortgage repayment. You can use this towards ever-increasing living expenses, designate the extra funds to a high interest savings account for a new venture, renovations or a maybe that dream holiday. You will pay less income tax in every financial year as long as you continue to salary package your home loan.
Can you salary package your principal and interest?
Absolutely. It’s up to you how much you decide to allocate to your mortgage repayment. Obviously, paying towards principal and interest with your pre-tax dollars is the best way to get your mortgage paid off sooner.
Set up instant deductions to your lender
Your loan repayments can be paid directly to your lender from your salary deductions. Instead of having to make loan repayments separately from your bank account, this is a convenient way to pay your mortgage. Because it is set up to come out of a set pay cycle, you can nominate when payments are made in line with your mortgage due date. This means you will never be late for a repayment.
Are you already salary packaging?
That’s fine. You can salary package multiple expenses depending on your employer. Even if you are already making the most of salary packaging for your bills, car, meals and entertainment or childcare fees, you may be able amend your current arrangement to include mortgage repayments. As long as you are still under the maximum cap during that FBT year, get those pre-tax dollars working as hard as possible.
Is salary packaging a mortgage considered a fringe benefit?
Some employee benefits such as salary packaging may be subject to Fringe Benefits Tax (FBT). This is a tax payable by any employer when they allow benefits to be paid for an employee in lieu of their cash salary. But, employers in certain sectors may be entitled to FBT exemptions or rebates. This means they are able to offer cost-effective salary-packaged benefits (including mortgages) to their employees.
Want to know more? Ask The Salary Packaging People.
If you’d like to know more about the benefits of salary packaging your mortgage, have a chat to a real person on the phone by giving us a call or send us a message online.