What impact will stage 3 tax cuts have on your borrowing capacity?

From 1 July 2024, the stage 3 tax cuts will come into effect, reducing the total amount of tax you will have to pay on your income, which will ultimately put more money into your back pocket.

These cuts will make a difference from your first pay packet - because the amount of tax that is normally withheld will be reduced. To see the impact of these tax cuts on your salary, you can use this calculator from the Treasury here.

For anyone looking to secure a home loan, these tax cuts - and the subsequent increase to your take home pay - could mean your borrowing capacity, that is, the maximum amount you can potentially borrow from your bank for a home loan, gets a bump too.

How will a tax cut increase my borrowing power?

When a bank is assessing you for a home loan, there are a number of things they will review, including your deposit size and your credit history.

However it is your income (and the income of whoever you may be applying for the home loan with) that is one of the most important things they will consider.

With a tax cut, the amount of money you can spend per pay packet increases, which increases the amount you could then pay on your monthly mortgage repayments.

How much more could I borrow with stage 3 tax cuts?

RateCity.com.au research shows for a single person on a $100,000 income (before

tax), their total borrowing capacity could potentially increase by more than $20,000 once the tax cut takes effect. For a family earning $150,000, their borrowing capacity could increase by almost $30,000.

It’s important to remember that calculations are estimates only and a person’s maximum borrowing capacity will depend on their specific financial situation and in some cases, the lender they are applying with. For personal advice, we recommend reaching out to a mortgage broker or directly to your preferred lender.

Potential increase to borrowing capacity for a single person earning $100K

Based on someone with no additional debts (including credit card debt), with minimal expenses, applying for a loan with a 20% deposit with a big four bank.

Potential increase to borrowing capacity for a family of four earning $150K

Based on a family of 2 adults, 2 children, with no additional debts (including credit card debt), with minimal expenses, applying for a loan with a 20% deposit with a big four bank.

What are other ways I can boost my borrowing capacity?

Trying to secure the home of your dreams can be tricky - particularly when house prices continue to hit record highs, all while the cost of living increases too.

However, securing your perfect property can be a lot easier by making some changes, or different decisions on how you spend your money.

Here are some ways you could increase your borrowing capacity

• Close down your credit card
  • When assessing your application for a home loan, the bank will look at any debts you have owing including your credit card limit, even if you don’t owe a single dollar on it. If you shut down your credit card, you’re likely to see your borrowing capacity increase significantly.
• Look for a low rate
  • A higher interest rate means higher monthly repayments. The lower your variable interest rate, the more you are likely to be able to borrow.
• Increase your income
  • This is the easiest way to increase your borrowing capacity - but can definitely be the hardest! If there’s an opportunity to increase your pay on an ongoing basis, you should be able to increase your borrowing power.
• Cut back on your spending
  • The less you spend, the more you save, which means you will have a bigger deposit, which means you could get a lower interest rate! Prioritise your budget, and try to eliminate any bad spending habits at least three months out from applying for a mortgage.
• Get help from a mortgage broker
  • Speaking with a professional mortgage broker will give you direct access to a lot of the information and answers you’ll need on your journey to purchasing a home.

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