Federal Budget 2024: Tax cuts expected to boost borrowing power

May 20, 2024

A typical homebuyer’s borrowing capacity will rise by tens of thousands of dollars next financial year as a result of tax cuts that form part of a federal budget designed to lower the cost of living.

A typical taxpayer will see their take home pay rise next financial year, in most cases by thousands of dollars, with adjustments to tax rates shaving thousands off their tax bill.

The effect of higher incomes will increase borrowing capacities for buyers, giving them more money to spend when buying a property.

The boost to budgets is expected to help homebuyers struggling to purchase a home, with housing affordability at its worst level in three decades.

Every taxpayer will get a tax cut from July 1 under the updated stage three tax cuts, regardless of their income, with the exact amount depending on how much they earn.

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Homebuyers will get a boost to their borrowing power due to tax cuts outlined in the federal budget. Picture: David Swift


Based on government estimates, a person on the average wage of about $73,000 will get a tax cut of $1504.

Those earning $45,000 get a $804 annual tax cut, while people earning $100,000 save $2179 and people earning $150,000 save $3729 per year.

How much tax cuts could boost buying power

A home buyer with a $100,000 income would see their borrowing capacity increase by about $25,000, while a buyer earning $150,000 could borrow about $37,000 more, according to Mortgage Choice broker James Algar.

“If you’re down to your next bid at auction, that could easily be the difference between tapping out and just snagging in,” he said.

Those figures were based on an owner occupier with a single income, with an interest rate of 6.19%, a loan-to-value ratio of 80% or less, and a 30-year loan term, Mr Algar said.

“It’s reasonable to assume this will have a more meaningful impact on households with dual incomes,” he said.

“You can safely assume it would have at least double the impact, assuming they’re earning similar incomes.”

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Owner occupiers will get a marginally higher increase to their borrowing power than investors. Picture: Getty


Borrowing capacities have fallen by about 30% since interest rates started rising in May 2022.

First-home buyers purchasing properties at the affordable end of the market would benefit from the most from a boost to their borrowing capacities, Mr Algar said, although cautioned buyers against pushing themselves to the very limit of their borrowing capacities.

“It will help investors, but I think it will help owner occupiers marginally more,” he said.

He said the impact of the tax cuts wouldn’t immediately be reflected in lenders calculators after July 1.

“Whenever tax rates have been adjusted in the past, it’s typically taken banks a month or so to update their calculators.”

“If you want to see the difference it will make a bit quicker, you’re probably best talking to a broker because we can tweak the calculators a little and manually adjust to see those changes.”

PropTrack senior economist Paul Ryan said tax cuts would provide a slight tailwind for the property market, particularly for more affordable homes.

“There’s a lot of people who are really constrained by borrowing capacities at the moment, particularly first-home buyers,” he said.

“First home buyers in particular are doing it tough with higher interest rates and are the ones most constrained with borrowing capacities.”

“I think it will give a bit of a boost to the market, particularly at the lower end of the market.”

Source: Treasury.gov.au
Taxable income  Tax cut
$30,000 $354
$40,000 $654
$50,000 $929
$60,000 $1,179
$70,000 $1,429
$80,000 $1,679
$90,000 $1,929
$100,000 $2,179
$110,000 $2,429
$120,000 $2,679
$130,000 $3,379
$140,000 $3,729
$150,000 $3,729
$160,000 $3,729
$170,000 $3,729
$180,000 $3,729
$190,000 $4,529
$200,000 $4,529

Student debt relief won’t meaningfully increase borrowing power

Although more than three million people will see their student debt reduce due to retroactive changes to the rate of indexation on student loan balances, this move is unlikely to increase borrowing power by much, according to Mr Algar.

“The likelihood is a lower student debt will make no meaningful difference to the loan capacity at all,” he said.

This is because borrowing capacities are more influenced by take-home pay rather than a buyer’s existing student loan balance, Mr Algar said.

Reducing a student loan balance won’t influence how much debt needs to be repaid each year, as this figure is influenced by gross taxable income, Mr Agar said.

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Despite millions of students having their student debt reduced, it’s unlikely to improve their borrowing capacity in a significant way. Picture: Jeremy Piper


However, the reduced loan balance could allow people to repay their student loans sooner, which would have a bigger impact.

“In the majority of cases, most people’s borrowing power dramatically improves if they’re able to clear their student debt in full prior to applying for a mortgage,” he said.

Under changes outlined in the federal budget, the indexation rate on student debt balances will be capped at the lower of the Consumer Price Index (CPI) or the Wage Price Index (WPI), meaning balances won’t grow faster than wages.

Debt relief will be backdated to all Higher Education Loan Program (HELP), VET Student Loan, Australian Apprenticeship Support Loan and other student support loan accounts that existed on 1 June 2023, shaving thousands off loan balances in some cases.

 

 

Source: realestate.com.au

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