The Australian Federal Budget 2024-25, delivered by Dr. Jim Chalmers, brought forth significant changes, especially with the implementation of the Stage 3 tax cuts. These cuts are set to reshape the financial landscape for many Australians and Australian expats, particularly mortgage holders.

Here’s an in-depth look at how these changes will affect borrowing capacity and the broader economic implications.

Boosting Borrowing Capacity

One of the most significant aspects of the Federal Budget 2024-25 is the introduction, or confirmation of the Stage 3 tax cuts, which are expected to increase the disposable income of many Australians. These tax cuts will create tax savings for the majority of working Australians, with the 19% rate starting at $18,201 being reduced to 16%, the 32.5% band being reduced to 30%, and the 37% band starting at $135,000 instead of $120,000. Further, the top tax rate of 45% will now start at $190,000 instead of $180,000.

This change is projected to put more money in the pockets of working Australians, directly influencing their borrowing capacity.

For mortgage holders and potential homebuyers, this means:

• Increased Disposable Income: With more take-home pay, individuals will have more funds available for mortgage repayments, allowing them to afford higher loan amounts.
• Improved Debt-to-Income Ratios: Lenders often assess borrowers' eligibility based on their debt-to-income ratio. With increased income, these ratios will improve, making it easier for borrowers to qualify for larger loans.
• Higher Property Demand: As more people gain the financial capacity to borrow, the demand for property is likely to rise. This could lead to increased competition in the housing market, potentially driving up property prices.

In terms of the actual dollar amount of increased borrowing capacity, the following estimates are outlined below based on your annual income:

It’s important to note that these numbers could differ between lenders, but they provide an approximate outline of the additional funds that you could borrow based on your income level.

Inflationary Concerns

While the tax cuts are poised to boost borrowing capacity, there are concerns regarding their impact on inflation. Increased disposable income and higher borrowing capacity can lead to heightened spending, which may exacerbate inflationary pressures. Here’s how:

• Increased Consumer Spending: With more money in hand, consumers are likely to spend more on goods and services, driving demand and potentially increasing prices.
• Rising Property Prices: As mentioned earlier, higher borrowing capacity can lead to increased demand for housing. This demand, coupled with limited housing supply, can push property prices up, contributing to inflation in the housing market.
• Wage Growth Pressures: Employers might face pressure to increase wages to match the higher disposable incomes of their employees, further fuelling inflation.

Whilst the tax cuts are not expected to see a spike in inflation given their limited overall impact compared to what was originally proposed, and current prices of non-discretionary goods and services, we also see that it won’t result in the RBA cutting the cash rate in the near term.

Limited Impact on Reducing Inflation

Despite the potential benefits for mortgage holders, the Stage 3 tax cuts are expected to do little to curb inflation. The primary goal of these tax cuts is to boost economic activity and improve household financial positions. However, without complementary measures to control inflation, such as tighter monetary policies or increased housing supply, the risk of sustained inflation remains.

In summary, the Federal Budget 2024-25 and the introduction of Stage 3 tax cuts will likely enhance the borrowing capacity of Australian mortgage holders, making homeownership slightly more accessible for many. However, this comes with the caveat of potential inflationary pressures, or at least a lack of deflationary pressures, particularly in the housing market. Mortgage holders should stay informed and consider the broader economic context when making financial decisions in the coming years.

Conclusion

The Stage 3 tax cuts present a double-edged sword: they provide significant benefits to mortgage holders by boosting borrowing capacity but also carry the risk of increased inflation. As these changes unfold, it will be crucial for both policymakers and consumers to navigate the economic landscape carefully to ensure sustainable growth and financial stability.

Ally Home Loans Pty Ltd is your ally in finance for all of your home loan, investment property, business and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.

Book an obligation-free, complimentary consultation here today.

Ally Home Loans Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.