Tax cuts improve borrowing power
Know someone struggling to get their loan across the line because of servicing? Well, in July this year, we will see our tax cuts come into play, which means we all get to keep more of our income, and it also means we can borrow more. We’ve already seen some of our lenders start to update their servicing calculators and we can see the positive difference this tax rate change is making. Meanwhile, the stimulus measures in the 2024-2025 Federal Budget to support our economy, didn’t do much to change the views of economists, who predict rate cuts at the end of this year. The budget put forward a set of forecasts on unemployment, wages, and our population growth, which suggests that our economy is likely to cool despite there being near-term risks. If these projections unfold, interest rate cuts should start at the end of the year as predicted.
Borrowing more with tax cuts
The Commonwealth Bank of Australia (CBA) recently updated their servicing calculators to include the stage three tax cuts and made other important adjustments. Given that these loans we're processing today will likely settle from 1 July, the changes account for these most recent government measures. Many of the other lenders are also starting to follow suit.
These tax changes, which filter through to each bank’s servicing calculators, show that less tax is now being subtracted from each borrower's income, meaning more money is available for future repayments - hence we can borrow more. See two examples below, which demonstrate the new tax rate borrowing effects:
Example 1:
Single applicant, PAYG base annual income of $108,000, 1 credit card at $6,000, $2,778 in monthly living expenses = max borrowing for a home loan of $446,000 - before the change.
Same scenario, with new tax rates being applied = maximum borrowing of $470,000.
Borrowing $24,000 more with the tax cuts
Example 2:
Joint applicants, PAYG base annual income for the household of $314,000, 1 credit card at $6,000, $7,152 in monthly living expenses = max borrowing for a home loan of $1,351,245 - before the change.
Same scenario, with new tax rates being applied = maximum borrowing of $1,427,052.
Borrowing $75,807 more with the tax cuts
To find out what loan amount you're eligible for, hit the start today button and let us calculate your borrowing capacity.
The Budget: “relief for cost-of-living”
The 2024-25 Australian Budget delivered a large surplus with subsidies for electricity, rent assistance, student debt support, cost of medicine, and more. When you add the stage three tax cuts we’ve highlighted above, these measures should all combine, to provide relief to the cost-of-living pressures we’re all feeling.
Judo bank economist Warren Hogan, the man who most accurately predicted last year's interest rate hikes, spoke to us brokers during the week and explained how the budget doesn’t really change the view of economists and that it will still be, a difficult year for consumers.
Hogan mentioned, that whilst wages have increased, some people have now crept into higher tax brackets (bracket creep) and therefore have to pay more of this additional income to the government. Inflation has made living so expensive and while tax cuts should theoretically help with this by providing more disposable income to spend in the economy, in reality, the effect won't be that significant.
AMP’s Shane Oliver suggested the same this week.
Very low chances of rate hikes
ANZ senior economists share a similar sentiment, that while there are risks that could trigger a rate hike, we should see the economy cool.
The consensus is that we will see a rate cut at the end of the year, or the start of 2025. And it may only be one or two, not three cuts anymore. Shane Oliver from AMP writes, “the most likely scenario is that the RBA holds rates ahead of rate cuts starting later this year.”
Data on unemployment and wages, confirm views
According to the Australian Bureau of Statistics (ABS), the unemployment rate increased to 4.1 per cent in April 2024. While this increase in this jobless rate is somewhat supportive of the view that the economy is worsening and rate cuts are on the way, a lot of the unemployed were preparing to start a job this month according to the ABS, meaning we could see this trend reverse – not a clear signal really. See here the projections from the Budget, Treasury, and Westpac’s Chief Economists. Forecasts are for unemployment to worsen.
Wages grew by 0.8% in the March quarter of 2024, according to the ABS, which was slightly below market expectations. Wages growth forecasts are for this index to slow but as you can see, at a slightly different pace depending on who's doing the forecasting.
Population growth masking the slowdown
We can see from this third graph provided by Westpac below that our population growth has been immense, and this has contributed to inflation pressures including skyrocketing our rents. Economists, not just those from Westpac, but from Macquarie too, suggest that Australia’s migration numbers are set to taper off in 2024, and when that happens, we should see a bit of pressure come out of the economy. Experts believe that foreign student population growth has been a factor driving up rents so when this slows, we should see this fall back to somewhat normal levels and contribute to the broader economic slowdown.
Final thoughts
We can see that the forecasts from our Banks, Treasury, and the RBA, are for unemployment to worsen, for wages to cool and for our population growth to slow down. The budget does look to support households hurting at the moment, and it will most likely boost spending by a tad but with how expensive life is in general, the effects of this stimulus support provided by the Budget will be modest. Serviceability improvements from tax cuts will see lending loosen up a tad so it will be interesting to see what happens to property prices at the end of the year, especially after rates start coming down. All these data points we will be paying particular attention to. We hope to see these rate cuts in November as predicted by the experts, even sooner. As always, we will stay close to all of this and continue to ensure your lending solution is in your best interests to tackle the year ahead.
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