Understanding Home Loan Salary Sacrifice: A Smart Move for Australian Borrowers

What is Salary Sacrifice?

Salary sacrifice is an arrangement where you forgo part of your salary in exchange for benefits such as superannuation contributions, a company car, or even a laptop. In Australia, this can be a tax-effective strategy. However, it’s essential to understand how it might affect your ability to secure a home loan. Lenders often scrutinise your net income, which can be reduced by salary sacrifice, potentially impacting your borrowing capacity.

How Salary Sacrifice Impacts Home Loans

Reduced Borrowing Capacity

When you engage in salary sacrifice, your taxable income decreases. While this can be advantageous for tax purposes, it can also reduce your borrowing capacity for a home loan. Lenders primarily assess your ability to repay based on your net income. Therefore, a lower taxable income might mean a smaller loan offer.

Benefits on Loan Repayment

On the flip side, salary sacrifice can free up cash flow by reducing your tax liability. This extra cash can be directed towards additional home loan repayments, reducing your principal faster and saving on interest in the long run.

Practical Tips for Using Salary Sacrifice

Consult with a Financial Advisor

Before committing to a salary sacrifice arrangement, consult with a financial advisor. They can help you assess whether the benefits outweigh the potential drawbacks concerning your home loan application.

Clearly Communicate with Your Lender

When applying for a home loan, clearly communicate your salary sacrifice arrangements to your lender. Provide documentation that outlines your total salary package, including all sacrificed amounts. This transparency can help the lender accurately assess your financial situation.

Balance Your Salary Sacrifice

If you're considering salary sacrifice primarily for superannuation, ensure it doesn’t severely impact your ability to secure a home loan. A balanced approach can help you reap the benefits of salary sacrifice without compromising your home ownership goals.

Common Mistakes to Avoid

Ignoring the Impact on Borrowing Capacity

One of the biggest mistakes borrowers make is underestimating the impact of salary sacrifice on their borrowing capacity. Always factor in how a reduced taxable income might affect your loan eligibility and offer.

Over-Sacrificing

While it might be tempting to maximise the benefits of salary sacrifice, over-sacrificing can leave you with insufficient income to meet other financial commitments, including loan repayments.

How Esteb and Co Can Help

At Esteb and Co, we understand the intricacies of home loans and salary sacrifice arrangements. Our experienced brokers are here to guide you through the process, ensuring you make informed decisions that align with your financial goals. Whether you're a first-time homebuyer or looking to refinance, we provide personalised advice tailored to your unique circumstances.