Rate hike would ‘offset the benefit’ of tax cuts

As of 1 July 2024, the federal government’s revised stage 3 tax cuts have taken effect in an effort to address ongoing cost-of-living pressures and provide an extra boost to Australians’ incomes.

The tax cuts have reduced the 32.5 per cent tax bracket down to 30 per cent and have increased the 37 per cent tax bracket threshold from $120,000 to $135,000, with the lowest tax bracket being 16 per cent for those earning $18,000–$45,000 and a 45 per cent threshold for those earning $190,000 and above.

According to research released by Roy Morgan, the levels of mortgage stress are set to begin decreasing over the next few months due to the added income from the stage 3 tax cuts.

In the three months to June, there were 1,602,000 mortgage holders (30.3 per cent) ‘at risk’ of ‘mortgage stress’, representing an increase of 88,000 (0.6 per cent) on a month earlier. This still sits below record highs reached earlier in 2024.

However, with the June quarter Consumer Price Index (CPI) still to come, there is still the threat of the Reserve Bank of Australia (RBA) further raising the official cash rate should the CPI print return hotter than expected.

Speaking to Mortgage Business, Finni Mortgages head of broker Eva Loisance said while the stage 3 tax cuts will definitely help some households cover growing monthly mortgage repayments, another rate hike “would completely offset the benefit”.

“[A] 0.25 per cent increase is another $150 per month on the average home loan of $750,000, the tax cut from an average income earner of $90,000 is $160 per month,” Loisance said.

“In regards to borrowing capacity, while the tax cut is technically adding surplus income for borrowers, most lenders have increased the minimum spending amount per household depending on income (HEMS household expenditure measure), which again, offsets any benefit from the tax cut.”

Contrarily, Roy Morgan CEO Michele Levine said that even with cash rate increases of 0.25 per cent in August and September (which would take the cash rate up to 4.6 per cent and 4.85 per cent, respectively), levels of mortgage stress should still decrease.

“…although interest rate increases would normally lead to a higher level of mortgage stress, the Stage 3 income tax cuts delivered to millions of Australians in early July are set to have a larger impact in driving down mortgage stress over the next few months,” Levine said.

“Even if the RBA increases interest rates by +0.25 per cent in both August and September… the level of mortgage stress would still drop by 24,000 to 1,578,000 mortgage holders (29.8 per cent) considered ‘At Risk’ in the three months to September 2024.”

The RBA is set to meet for its next monetary policy meeting on Monday (5 August), with the decision being announced on the afternoon of Tuesday (6 August).

As of 22 July, the ASX’s RBA Rate Tracker revealed that market expectations show 75 per cent expect no change in the cash rate, while 25 per cent see an increase to 4.6 per cent.

[RELATED: How will stage 3 tax cuts increase borrowing capacity?]

Adrian Suljanovic is a journalist at Broker Daily with more than two years experience reporting on all facets of the third party distribution channel.

Adrian has written for a range of business and finance titles including IFA, Investor Daily and Lawyer’s Weekly before joining the mortgages team in 2022.

He graduated from the University of Wollongong in 2021 gaining a Bachelor of Communication & Media with a major in Digital & Social Media.

E-mail Adrian at: This email address is being protected from spambots. You need JavaScript enabled to view it.