Aspiring home buyer’s borrowing capacity could increase by up to $47,000, thanks to the incoming stage-three tax cuts, according to new analysis by Compare the Market
While this is great news for househunter hopefuls, Compare the Market Economic Director David Koch said there may be some unintended consequences, including higher property prices.
“These tax cuts have the potential to boost borrowing power significantly,” Mr Koch said.
“But rather than helping people reach their property goals faster, they may just end up paying more as a result, as bigger deposits threaten to push up property prices.
“I really encourage people to run a mortgage stress test before making use of their improved borrowing capacity. If you max out on your loan, you could find yourself in a difficult situation, should your circumstances change down the track.”
The tax cut changes due to come into effect on July 1 include lowering the bottom marginal tax rate from 19 per cent to 16 per cent.
Compare the Market crunched the numbers and found a couple with no dependents on a combined $200,000 could see their borrowing increase from $877,000 to $924,000 – that’s a $47,000 boost.
It’s a similar story for a couple with two dependents on a combined $150K, who experienced a $39,000 increase in their borrowing power.
Meanwhile, a single with no dependents on an annual income of $100,000 had their borrowing capacity lifted by $23,000.
| Income | Borrowing power | Borrowing power after tax cuts | Difference |
| $100,000 | $401,000 | $424,000 | $23,000 |
| $150,000 | $646,000 | $684,000 | $38,000 |
| $200,000 | $877,000 | $924,000 | $47,000 |
| These calculations are based on a couple with no dependents, loan term of 30 years with an interest rate of 5.94%, with no ongoing fees. The living expenses were calculated via the Household Expenditure Measure using the 4000 postcode. The change in borrowing power following the July tax cuts assume that living expenses stay the same. | |||
| Income | Borrowing power | Borrowing power after tax cuts | Difference |
| $150,000 | $560,000 | $599,000 | $39,000 |
| $200,000 | $791,000 | $838,000 | $47,000 |
| These calculations are based on a couple with two dependents, loan term of 30 years with an interest rate of 5.94%, with no ongoing fees. The living expenses were calculated via the Household Expenditure Measure using the 4000 postcode. The change in borrowing power following the July tax cuts assume that living expenses stay the same. | |||
| Income | Borrowing power | Borrowing power after tax cuts | Difference |
| $75,000 | $412,000 | $428,000 | $16,000 |
| $100,000 | $548,000 | $571,000 | $23,000 |
| $150,000 | $793,000 | $832,000 | $39,000 |
| These calculations are based on a single income with no dependents, loan term of 30 years with an interest rate of 5.94%, with no ongoing fees. The living expenses were calculated via the Household Expenditure Measure using the 4000 postcode. The change in borrowing power following the July tax cuts assume that living expenses stay the same. | |||
“It’s a difficult time for anyone trying to get their first foot on the property ladder,” Mr Koch said. “Ever-rising property prices and higher rents coupled with inflation means it’s taking people longer to save for a deposit.
“For some, these tax cuts may seem like the golden ticket.”
Mr Koch said tax cuts weren’t the only way aspiring homeowners could boost their borrowing power.
Kochie’s tips for boosting borrowing power
Reduce your credit card limits or get rid of it
When lenders calculate borrowing power, they use the entire credit card limit, rather than the balance, as part of their serviceability calculations. Therefore, reducing your limit or closing your credit card may help boost your borrowing power.
According to a Compare the Market analysis, a $10,000 credit card limit held by someone earning $100,000 would reduce their borrowing capacity from $552,000 to $505,000.00 – a difference of $47,000.
Know your credit score
Websites like Compare the Market provide free credit score checks to help you understand how strong your borrowing position is. Lenders use your credit score and credit history to calculate risk when assessing your application. Improving your credit score is one way to improve your chances of being approved.
Pay off any debts
Banks must consider all financial obligations when calculating your ability to repay debt including credit cards, car loans or personal loans. If you work to reduce or eliminate your high-interest-rate debts, you may be able to increase your borrowing capacity.
Although Higher Education Loan Programs (HELP) can’t accrue interest like credit cards can – it can be brought in line with inflation. For example, in July this year, millions of Australian university students or people who are still paying off that HELP debt will be slapped with a cruel 4.7% increase in the amount they owe.
If you have the ability to pay off your HELP debt, then you might consider doing this, as it may boost your borrowing power.
Consider a joint purchase
You could team up with a family member, partner or friend if your borrowing capacity isn’t high enough and you’re struggling to meet the lender’s income requirements.
Joint purchases have become a popular way for many to break into the property market. Two incomes are usually better than one – so you may find your borrowing power increases with an additional person on the loan.
For more information, please contact:
Natasha Innes | 0416 705 514 | [email protected]
Compare the Market is a comparison service that takes the hard work out of shopping around. We make it Simples for Australians to quickly and easily compare and buy insurance, energy, travel and personal finance products from a range of providers. Our easy-to-use comparison tool helps you look for a range of products that may suit your needs and benefit your back pocket.
