The start of the new financial year next week will mean the highly-publicised stage-three tax cuts will kick in, and borrowers might find themselves with more options than they first thought, new research shows.
National mortgage broker Aussie investigated a range of scenarios for potential purchasers to see what impact the cuts could have for those trying to maximise their borrowing capacity when seeking a home loan.
The tax cuts, which will affect 13.6 million Australians, reduce the 32.5% tax bracket down to 30 per cent and increase the 37% threshold from $120,000 to $135,000. Additionally, the 45% threshold is being increased from $180,000 to $190,000, and the lowest tax bracket drops to 16%, from the current rate of 19%, for those earning between $18,000 to $45,000.
One scenario explored by Aussie found that single Australians with no dependents earning $120,000 per year in FY24, who could borrow a maximum $615,135.18, will increase their borrowing capacity in FY25 by $27,061.93 on a mortgage based on a 6.28% interest rate to $642,197.44.
A married couple with two dependents earning a combined taxable income of $280,000 will increase their borrowing capacity by $75,345.89 on a mortgage with a 6.28% interest rate in FY25, which is a 5.64% increase on their previous maximum borrowing amount of $1,334,871.22.
Aussie Chief Operating Officer, Sebastian Watkins, thinks the stage three tax cuts could have some serious implications for those who are just outside their ideal borrowing capacity.
“Through our broker network, we have been receiving feedback that many potential purchasers are just coming short of the desired amount they need to purchase their dream home, especially as the price of property increases quicker than their ability to save or their wages to grow”, Watkins says.
“They evidently have two choices; look elsewhere for something cheaper and most likely less desirable to them or continue trying to save as much as they can whilst hoping their incomes grow at a higher rate than property prices.
“These tax cuts mean there is a cohort of purchasers, who come July 1st, could increase their borrowing capacity as their net income will grow and they will have more optionality when seeking finance for a home.”
For those who are still outside their desired borrowing capacity even with the tax cuts, Watkins stresses the need to remain focused on the end homeownership goal.
“Even if the tax cuts don’t automatically bump you up enough in terms of borrowing capacity, the additional income can be funnelled straight into extra savings for your deposit”, he suggests.
“Ultimately, the healthier your deposit the less you need to borrow, so this is really a win-win situation for those ready to enter the market.”
Watkins believes the tax cuts could also save years off the average home loan,
“Homeowners who put their entire stage-three tax cut savings on their mortgage could shave two to six years off the life of their loan, saving thousands”, he says.
“Those earning $70,000 and who put their full monthly saving of $1429 on their loan could reduce repayments by two to three years and pocket up to $75,530 in interest payments over the entirety of the debt.
“For someone on double that wage, savings climb to as much as $171,000 and borrowers could unchain themself from their bank six years early”, he concludes.
