How will stage 3 tax cuts increase borrowing capacity?

Franchise brokerage Aussie Home Loans (Aussie) released new research yesterday (19 June) finding that the upcoming stage 3 tax cuts could increase a buyer’s borrowing capacity.

The tax cuts are set to come into effect from 1 July and will reduce the 32.5 per cent tax bracket down to 30 per cent and increase the 37 per cent tax bracket threshold from $120,000 to $135,000.

The lowest tax bracket rate will be reduced to 16 per cent for those earning $18,000–$45,000, while the 45 per cent threshold is also being increased to $190,000, up from $180,000.

Aussie’s research found that single Australians with no dependents earning $120,000 a year can currently borrow a maximum of $615,135. Due to the tax cuts, this could increase in the financial year 2025 by $27,062 (or 4.4 per cent) on a mortgage based on a 6.28 per cent interest rate.

A married couple with two dependents earning a combined gross income of $280,000 could increase their borrowing capacity by $75,345 on a home loan with a 6.28 per cent interest rate in FY25.

This reflects a 5.64 per cent increase on their previous borrowing capacity of $1,334,871, rising to $1,410,217 after the tax cuts.

The tax cuts could also shave years off a borrower’s mortgage, Aussie’s research has revealed. If those who earn $70,000 put the entirety of their $1,429 yearly tax cut savings into their loan repayments it could take two to three years of their loan.

The interest saved on this borrower’s scenario would total $75,350, according to Aussie.

For those earning $140,000 a year, loan savings increase up to $171,000 over the entirety of their loan and borrowers could finish repaying their mortgage up to six years early.

Sebastian Watkins, Aussie’s chief operating officer, said that the tax cuts may have “serious implications” for borrowers who are just outside their ideal borrowing capacity.

Watkins said: “Through our extensive 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.”

The COO said that these buyers are forced to choose between buying a cheaper home (and most likely less desirable) or continuing saving and hoping that their wages grow faster than property prices.

The tax cuts would give these borrowers a boost, Watkins said: “These tax cuts will mean there is a cohort of purchasers, who come 1 July, will increase their borrowing capacity as their net income will grow and they will have more optionality when seeking finance for a home.”

Watkins said that those who are still outside of their ideal borrowing capacity, even after the tax cuts, should focus on saving their increased income to achieve their home ownership goals.

“Even if the tax cuts don’t automatically bump you up enough in terms of borrowing capacity, the additional income can be funneled straight into extra savings for your deposit. 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 said.

[Related: Australians planning to save tax cut earnings]