Why a tax system change could give you more borrowing power

Introduction

A major topic of late in both the political and media arenas has been the Federal Labor Government’s national Stage Three Tax Cuts.

A talking point of note, to be specific, is how these recent tax cuts will affect borrowers.

The Stage Three Tax Cuts, which have been in the works for a while, were put in place on July the first of this year.

The impact of these tax cuts is expected to be seen in property purchases, making it easier in particular for first-time home  buyers to break into what is viewed as currently an incredibly tough market.

In this week’s blog post, I will break down the Stage Three Tax Cuts to help you understand what’s really going on.

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A significant change that the Stage Three Tax cuts have made is to – in short – lower the bottom tax rates and to increase higher tax bracket thresholds.

To elaborate, this means that not everyone will receive the same reduction when it comes to their tax rate.

Those who are sitting in income brackets at the bottom of the tax bracket scale will have their rates decreased.

The good news for those in higher brackets, however, is that the income threshold which defines who is situated within them has been made bigger.

Thus, Aussie workers need to be making an even greater amount of money than they currently are to fall into these brackets.

As of the first day of this month – July, 2024 – and onwards, the following changes will apply:

• The tax rate which was previously nineteen percent, has gone down to sixteen percent
• The tax rate which was previously thirty-two point five percent, is now thirty percent.
• The thirty-seven percent tax threshold has gone from having a threshold of $120,000, to now starting at $135,000
• And the forty-five percent tax threshold will go from an annual income of $180,000 to an income of $190,000.

A person working and making $50,000 annually is able to come away with a saving of $929 thanks to the cuts, and someone making $200,000 annually is going to have a saving of $4529.

An example of what you could save thanks to the Stage Three tax cuts is easy to calculate using the Federal Government’s online tax cut calculator.

Please, however, keep in mind that what is calculated is approximate – things like the lender of choice and the client’s particular financial state can impact the borrowing limit they may face. Both a lender you’d like to go with, as well as a local mortgage broker, are be able to give more in-depth information and help.

The importance of the savings highlighted in the example prior is evident when one approaches the housing market.

This is because more savings gives potential buyers much more borrowing power than under the previous tax system when they retained less income.

When figuring out how much an applicant should be able to borrow, their income plays a major part – so if you take home a greater income after tax, you’ll be able to make bigger mortgage repayments.

For households which have two incomes coming in, the change in tax rates and brackets could have an effect that is even bigger than on single income households.

Furthermore, with major issues around the affordability of houses in Australia, the tax cuts are expected to help those looking to purchase a home.

By cutting taxes and raising the thresholds, people will be able to borrow a lot more money.

It has been observes that this could mean that those earning a middle-income may be able to borrow six percent more, while those earning a higher-income might borrow five percent more.

Such news is welcome, as in the past two years of cash rate increases, a thirty percent decrease in people’s borrowing capacity had been observed.

However, the cuts will also help any homeowners thinking of improving their dwelling as well as anyone looking to talk to a broker about additional prospects.

You can expect your bank to need around a month to make sure that they’ve changed over to the new tax rates, though you can speak to a mortgage broker to get a change made earlier.

At the end of the day, the Stage Three tax cuts will provide relief to homeowners doing it tough thanks to rapidly rising inflation, high mortgage repayments, and an increasing cost of living.

The changes will hopefully protect a lot of homeowners who would otherwise have had to sell their homes.

An issue that cannot be ignored, alas, is the Australian Prudential Regulation Authority (APRA) and their mandated serviceability buffer.

The buffer means that anyone looking to borrow must be able to show that they can pay their loan back even if the rate was three percent higher than what they are facing at the moment.

This impacts the price ranges that people are able to consider, as well as their ability to purchase a home.

The tax cuts will also likely cause concern for the Reserve Bank of Australia, who may see it as a cash rate decrease indirectly – one of somewhere from zero point five percent to zero point seventy-five percent.

This in turn may mean that the Reserve Bank may take even longer to reduce the cash rate.

Never fear, however!

Even if the tax cuts haven’t made a major change to the borrowing capacity you currently have, there are a variety of other methods you can use to raise the limit.  

These methods include getting a side hustle or finding a way to make your income bigger, getting rid of your credit card (which eliminates the limit – something banks examine), speaking to a mortgage broker for advice, finding a rate that is low, as well as budgeting and spending a reduced amount of money.

Getting a loan can be hard for some people even when the financial climate is favourable – let alone in a cost-of-living crisis.

So don’t be too hard on yourself if the tax cuts haven’t helped as much as you’d hoped.

Key points

Below are a number of key points to keep in mind when your next pay packet comes in.

• Different tax brackets will be impacted differently.
• All workers should be saving in this new financial year thanks to the tax changes.
• Anyone looking to buy a property may now have greater borrowing power than before.
• Speak to a finance broker if you’re confused about how the changes will impact your potential loan application.  

The Stage Three Tax Cuts may have been welcomed by many, as the nation faces a cost-of-living crises.

It remains to be seen how they will actually impact the Australian property market.

Conclusion

Ultimately, the tax cuts introduced this year appear to have given an exciting opportunity to any potential property purchaser in 2024/2025.

It also marks a point at which it would be wise for you to touch base with your finance broker to discuss your options when it comes to property and finance.

For more about how the tax cuts can benefit first home buyers, make sure you read the upcoming blog post.

If you or someone you know would like more information, please reach out to the friendly team at AA Finance Solutions for help and support.