More Rate Cuts ✂ & the 2020 Budget
What about that for news to digest on a Wednesday! Our Federal Treasurer, Hon. Josh Frydenberg MP, delivered the 2020 Federal Budget and as expected, there’s a significant amount being spent to try and springboard the economy. On the same day, Governer Philip Lowe signalled that lower interest rates could be on the way. See here our quick summary of what this all means, from a property and finance perspective. Enjoy.
The odds for lower rates are shortening...
Chief economists, including Bill Evans from Westpac and others from ANZ and CBA, believe the RBA will reduce the cash rate next month, on Melbourne Cup day.
Yesterday, Governor Philip Lowe kept the official cash rate on hold. He concluded in his statement that the RBA "continues to consider how additional monetary easing could support jobs as the economy opens up further".
Monetary easing is basically another term for reducing interest rates and when he’s using "additional monetary easing", in his speeches, then it’s our opinion too that it’s definitely on the cards.
The official cash rate is at the moment sitting at .25 percent. Variable repayment type rates and fixed rates that our big lenders are offering are much higher than this to cover their costs associated with lending this money.
Many economists surveyed by Bloomberg believe the cash rate will be reduced to .10 percent, so a reduction of .15 percent.
The questions remain, how much of this reduction will actually get passed onto our borrowers and, do we fix our repayments now or stay or continue as variable?
Variable rates are still higher than our fixed rates, so if you’ve fixed, don’t worry. There are still a few more rate cuts needed before the variable rate gets anywhere near these fixed rates that are on offer at the moment. Fixed, as a repayment type, is still a sound option, especially given that these rates are expected to remain lower than our variable rates for a long time. If there’s a rate cut next month, in combination with the budget stimulus, we think the government will sit back to see how it all unfolds for the economy - for a decent amount of time.
The 2020 Budget
What’s likely to filter through to the property and finance world is...
Depreciation ‘game changes’:
From now until June 30, 2022, businesses (not our big banks, medical giants or large miners though), with a turnover of up to $5 billion (so 99% of businesses), can deduct the full cost of eligible depreciable assets. For small and medium sized businesses, second-hand assets will also be covered.
The current instant asset write-off has been extended to 30 June 2021. Businesses with turnover of up to $500 million can instantly write-off multiple assets worth up to $150,000 each.
That's a bit much to digest, you're right. Basically, this initiative could mean that businesses could have larger write offs which yes, will reduce profit and lower taxable income and that's the plan behind it so businesses are better off.
With lower income you would think that you would have less income available for servicing a loan, but the banks will allow for this amount to be added back so you won’t be worse off from a lending perspective. Having a large write off, as a once off, shouldn’t be detrimental to your borrowings as a result. You could even borrow the money to pay for this depreciable asset like a car, a ute, a truck or earth mover, pay it off over 60 months, and get the instant write off now - money for jam!
Tax cuts to be aware:
The new tax cuts will mean that potential borrowers have more funds available for borrowing. The 19 per cent tax bracket is to rise from $37,000 to $45,000. The 32.5 per cent bracket will rise from $90,000 to $120,000. The 45 per cent bracket will rise from $180,000 to $200,000.
First home buyers
Up to 10,000 more first home buyers will now be able to obtain a loan to build a new home or buy a newly built home with a deposit of at least 5 per cent and no lenders mortgage insurance. The previous purchase cap of $700,000 in NSW, will now be lifted to $950,000 which was a real struggle for a lot of first buyers in NSW, so this is a significant improvement.
The additional first home scheme places will now be provided from yesterday, 6 October 2020 to support the purchase of a new home or a newly-built home and will be available until 30 June 2021. If we look around the country, successful applicants, with the eligible lenders, will be able to buy homes worth up to $850,000 in Melbourne, $650,000 in Brisbane, and $550,000 in Perth.
Final Thoughts
Combining lower interest rates, lower tax rates, budget stimulus for businesses, first home owner initiative improvements and more, it’s clear that this unprecedented level of government support for home buyers and the construction industry alike is going to support property prices – the economy as a whole. It's going to be interesting times whichever way you look at it all.
If anything above had you thinking about what this could look like for you, feel free to reach out to us.
See you in next month’s blog and thanks for making it this far down!
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