EP. 1259 TAX CUTS FUEL SURGE IN BANK LENDING: MORE MONEY IN YOUR POCKET!

Could recent tax cuts really put more money in your pocket and increase your borrowing capacity? Join us in this episode as we chat with financial expert Zac Constantino to break down these transformative changes. We'll explore how the government's latest tax reforms, effective from the first of July, aim to benefit a broader segment of the population. You'll learn how these changes translate to increased cash flow and improved lending potential for millions of Australians, especially those earning up to $135,000 annually. Zac and I discuss the potential for a 4% to 6% boost in borrowing capacity and what that means for everyday Australians looking to improve their financial standing.

But that's not all! We dive deep into how individuals earning between $100,000 and $200,000 can expect their borrowing capacity to soar by $23,500 to $50,000. Beyond individual benefits, we also consider the broader economic implications, such as easing cost of living pressures and potential positive impacts on GDP, unemployment, and wage growth. Discover how lenders are adapting their servicing calculators and what this means for home buyers in the current mortgage rate landscape. Listen in for invaluable insights into how these tax cuts could benefit both you and the overall economy, and what you can expect as we head towards next year's mid-year financial review.

Transcript

Speaker 2: 0:00

So this is what happens in the morning when people are late to do morning minutes. We're totally unprepared and our guest has come in late Good morning. It throws us all. Oh hi, how are you?

Speaker 3: 0:27

Sorry, have I put your knickers in?

Speaker 2: 0:29

or not. My apologies, that's okay. That's okay, we're here, billy how are you?

Speaker 1: 0:34

yeah, great, it's my tax cuts is everyone all right this morning?

Speaker 2: 0:40

it's just yeah, we're all right yeah right this morning.

Speaker 3: 0:49

It's just yeah, we're right yeah, all right, thank god, this is the most candid start we've had to morning minutes ever. How can this, what's going on, mate you?

Speaker 1: 0:55

got new suits coffee cologne, new suit, new tie. You guys ready to go live? Absolutely no, not yet not yet.

Speaker 2: 1:15

What are you doing before we go live?

Speaker 1: 1:17

we're we're gonna get some information for when we do go live. We've got. We've got things to show.

Speaker 2: 1:23

Do you get nervous about going live, Billy?

Speaker 3: 1:26

No, not anymore. Billy is always alive.

Speaker 2: 1:35

Would you be nervous if I said to you we've been live the last minute? I can see we're live.

Speaker 1: 1:40

I was like no way. This is the intro this is guys.

Speaker 2: 1:49

This morning we are, we are live, uh, and we are late, uh. We're talking about tax cuts which have just come in, uh, first of july, and how they're affecting lending. It's the first time we've heard some great news. Stay tuned. I'm the ring leader, so let's do it.

Speaker 3: 2:29

Zach, constantino, constantino, mr.

Speaker 2: 2:31

Novak, the man that constantly changes his appearance like a chameleon, but greatest mortgage broker in town. How?

Speaker 3: 2:43

are you today? I'm beautiful, thank you. It actually uh good to be sitting next to the fashionably late mr dreary right here.

Speaker 1: 2:49

Look at you, man not today, though not today no we're doing all right tax cuts this is a big topic. Topic because um people have got more money in their pocket overnight yeah, well, it started literally overnight. Yeah, first day yesterday. So what is uh? What does it mean?

Speaker 3: 3:10

well, I suppose a bit of background is important. The previous government, the liberal government, um spelled out the the different stages in tax cuts and they did the stage one and stage two. You know one pre-covid, one during covid, and then this stage three was know one pre-COVID, one during COVID, and then stage three was already penned pre-COVID yeah, then the government changed right.

Speaker 1: 3:33

So they did a bit of a redesign.

Speaker 3: 3:34

It actually was redesigned by the current government to, I guess, weight more evenly to middle income rather than skewing up as high to the highest income bracket. So it essentially meant that a broader amount of the population, that our taxpayers, were better off. I think the original, the original proposal was it was going to impact around 10.8 million taxpayers and it's resulted in having, as you said, more money in people's and those people being 13.6 million people on average. So what's gone into effect yesterday wasn't 100% of what originally was designed, but it's worked out more beneficial for more of the population, given that they were proposed in pre-COVID times. So the economy was supposed to be positively impacted when they were talking about these.

Speaker 3: 4:31

It was supposed to foster a bit of growth All they've had to do is do a bit of a pivot and, as I said, redesign it so that they can recover the economy rather than, yeah you know, pump up those upper echelons. So, more money in people's pockets. What does it mean? It's between 4% and 6% in terms of net income back in people's pockets. Yeah, wow.

Speaker 1: 4:57

And I found this to be.

Speaker 2: 4:59

So for people that aren't across their tax, which is probably most of us, for people that aren't across their tax by doing absolutely nothing, they're going to be better off 4% or 6% cash flow in their pocket, which is a significant amount of money into Australians' pockets for 6.8 million people and then. So now you're saying that's now going to kick on to being able to lend more because of that.

Speaker 3: 5:27

Yeah, exactly right. So I guess, to summarise some of the tax changes, sorry. In short, yes, lending will improve, borrowing capacities will increase between 4% and 6%, and I guess that looks from what the changes are, in that you've got your tax brackets at around $18,000 and then you've got the next one up to 45, you've got another one up to 120 and you had another one up to 180 and then over 180 was the highest tax bracket.

Speaker 3: 5:59

Now what they've done is that they've done a couple of different things. They've reduced the tax rate on the lowest income threshold, so being, um sorry, the lowest threshold that has tax applied. So that's gone down from 19% to 16%, and that's, if you earn up to $45,000 per hour, you've got a 3% reduction in the tax rate, which actually equals more than a 45% borrowing increase. Then you've got the next bracket, which is 45 to 120. They've actually increased the threshold for that lower tax rate to 135 000.

Speaker 3: 6:41

So now not only has the tax rate for that original bracket been reduced from 32 percent, 32 and a half percent to 30 percent? When you were earning 130 000 last financial year, you were actually getting taxed at 37, but now you fall into a revised bracket and that revised bracket, as I said, used to be 45k to 120k, is now 45k to 135k, so that bracket's increased in terms of its, in terms of its capture, and the tax rates actually reduced. So if you're on a hundred and twenty thousand dollars last year, you're paying thirty two and a half percent tax.

Speaker 3: 7:22

If you're on a hundred and twenty thousand dollars this year you're paying thirty percent tax. But if you're on a hundred and thirty thousand you've actually gone down five percent or 7% in tax rate, because last year you were paying 37%, this year you were paying 30%. So in restructuring the brackets and reducing the tax rate it's shuffled a few people into, I guess, a more beneficial position. So net cash flow, because your income doesn't change, but what you get taxed does. Therefore there's more in your pocket.

Speaker 2: 7:54

And that extra money that you've got. If you take that to the casino and put on black and double it, then you've doubled your money again.

Speaker 1: 8:02

Happy days, not bad when it's free. Did you feel this was needed? We're talking to a lot of buyers at the moment that are not so worried about what they buy. It's how they buy it in terms of finance. They're struggling so much trying to pull the cash together from the bank.

Speaker 3: 8:22

Yeah, and I think this will be a big, big thing and obviously it's not going to happen. It has been triggered overnight. It's come into effect literally overnight since the start of yesterday, but it will take the whole year for people to reap the full amount of the savings and the benefits because it's on the pay-as-you-go tax thresholds. But I suppose back to what I was saying at the beginning about how these were penned, when there was no understanding or expectation of COVID and the economic decline that's been seen around the world now in terms of the recovery, I suppose you look at the household savings rate. In the pre-covered it was on average about 10, 15, depending on what bracket you're in. During covert that spike to. I think the highest was in whatever bracket 30 maybe on average around 25 now.

Speaker 2: 9:13

This is great information, by the way.

Speaker 3: 9:15

This is great and this is what it's going to help. Right, because there's a saving household savings ratio of about five percent at the moment, you know, across the broader range of income thresholds. Um, so people are feeling the cost of living. That's why this has been reshaped as helping recover from the cost of living, helping the households with the increased spend. So it will help people get that extra savings back in their pocket, aside from helping with, hopefully, some of the cost of living pressures.

Speaker 2: 9:51

Yeah well, so, if you just tuned in, guys and girls, we've got best mortgage broker in town, zach, we've got Billy real estate agent, mark the real estate agent, and we talk about these new tax cuts that have just come through just yesterday and how they're affecting loans. So, mate, you're a legend. Tell us more, keep going, keep going. So, mate, you're a legend. Tell us more, keep going, keep going?

Speaker 3: 10:15

Yeah for sure. So to get to the improvement in borrowing capacity, let's say someone earning $100,000, the increase in the amount that they can borrow will be around $25,000. Be around 25k. So 20, what do we got there? 23 to 25? Yeah, about 23 and a half thousand dollars, based on the tax bracket that they're in.

Speaker 3: 10:44

Based on the reduction in tax rate, they'll have a little bit of extra juice in the tank so they, on average, will be able to borrow around 550k um. Then you've got someone earning 130 000. They'll actually get an increase of um of 37 000 in uh borrowing capacity and then higher again. If you're making 150, you've got a borrowing capacity increase of 41 000 um. And then the last one for reference if you're earning $200,000 a year, you'll get an increase of around $50,000. So there are some significant increases to borrowing capacity with, you know, as little as a three percent drop in a tax rate or four percent drop in a tax rate. So the net income position will improve. Lenders are already pricing these into their servicing calculators. Not all of them have.

Speaker 3: 11:44

It will take the better part of a month for all the lenders to get in line, but yeah there's certainly some insight if you or anyone listening wants to talk about their borrowing capacity, if they've been on the fence, if they want to know what the changes are. So that's pretty much the crux of it.

Speaker 2: 12:01

And also, I think, to put this into real estate speak, it could be the difference of a family of three able to get into a two-bedroom unit and buy than a one-bedroom unit, so that $25,000 or that $35,000 could be enough to tip you into the next price range and off you go into a two-bedroom. It's bloody massive. It's great news.

Speaker 3: 12:31

It is good and I was reading something from the Treasury. Treasury did a paper on. You know what the what the intentions are around this and, as I alluded to, in terms of the economic recovery side of things, the easing of cost of living pressures, um, they're also expecting a little bit more of um to incentivise people. So, on the lower and the middle income, they realise you realise that you're getting a bit more for your money in terms of what you're earning. You're getting taxed less because, at the moment, hours worked and actual amount of jobs worked has gone through the roof again.

Speaker 3: 13:10

You know every average mom and dad or whoever's in the workforce is looking to respond to keep up their lifestyle or maintain their life in response to cost of living. Um, you look at the average hours worked. It's actually gone up like people are working more now than ever. Um, obviously it's in our nature but to keep up with with the cost of living so it that's, it will be.

Speaker 3: 13:37

It will be a sense of relief, but there's also um the intention behind it, as well as people, is one of a bit of incentive as well as to, you know, keep the economy going, because I suppose that then reads into how the economy is performing, gd, what the RBA measures inflation off and how rates may come down.

Speaker 2: 13:58

There's a lot of talk about. Did you take a smart pill this morning, or?

Speaker 3: 14:01

something? I woke up on the good side of the bed, I reckon. No, just a bit of reading, a bit of reading, but all the information is out there for everyone. But I suppose this platform helps.

Speaker 1: 14:13

Where's the easiest place to go and have a read at the moment?

Speaker 3: 14:17

I think on any of the government websites, if you want to know what they're thinking in terms of how they're measuring inflation. What their outlook is what these current schemes say, like you can get these off Treasury, off ATO, off the state and federal governments in terms of what the budgets are.

Speaker 3: 14:35

Yeah, Stick away from the news a little bit oh look, unless it's this sort of news, what was I saying? So, in terms of rate rises and rate cuts, obviously there's been heaps and heaps in the media about inflation going up again and the RBA maybe responding with another rate rise, and look that could happen.

Speaker 2: 15:02

We won't know until what do you guys think? What do you guys think at Shaw? What's your, because you work alongside some incredible mortgage brokers. What's the joint opinion amongst brokers on mortgage rates?

Speaker 3: 15:19

I think that you know to lift, and this is my personal opinion. I think that it would weaken the economy more because there doesn't seem to be, you know, the strength in a lot of the areas of the economy that's being reported. That would suggest that we have recovered. So any other rate rise would impact GDP, would impact unemployment, would impact wage growth in a negative sense and it would weaken the economy. So whilst CPI and inflation has gone up for the third month in a row, year on year it's still half of what it was 12 months ago. So I think it's just going to be another hold.

Speaker 3: 16:03

Our house view is that it's just going to be a longer hold. Certainly won't be any rate cuts this year, but maybe by May next year is probably the current picture. But again, we're due for the data to be released. Sorry for the expectations on what the RBA is feeling on the data in August. That'll be the next meeting. There's no July meeting. There's an August meeting and we'll really see what they feel. Why is there no July meeting? They've got to dissect all the data from the end of financial year being the latest quarter.

Speaker 2: 16:43

I never knew. And that's every year that I put rates up.

Speaker 3: 16:47

Well, it wasn't until this year. They reshaped all the meetings, so there was, I think there's only eight or nine meetings this year, maybe eight, whereas last year was every month.

Speaker 1: 16:59

A bit of holidays in between.

Speaker 3: 17:00

Yeah, a bit of holidays in between. Yeah, a bit of holidays. There's probably probably a few of the guys over in in europe or down at the snow not wanting to work. But no, august is the next meeting so that's interesting okay, we'll see what the result so.

Speaker 2: 17:16

so, before you go, in summary, new tax cuts through which is going to help people out there. In summary, that's buyers can lend more because the tax cuts that have just come in yesterday, literally I think I find that and that could really change the shape of people buying out there. This is the first good news we've had with lending in a very, very long time.

Speaker 3: 17:48

Happy new financial year.

Speaker 1: 17:51

Yeah, merry Christmas, christmas in July, well said, very good, anything else.

Speaker 2: 18:01

Billy, you got what do got bill? What do you? What do you got up your sleeve, anything else?

Speaker 1: 18:05

before we go, I'm not gonna, I'm not gonna match, match. Uh, that for the smart pill this morning. That was brilliant, good info. But yeah, certainly this is the, I think. Bringing it back to real estate, this will be the difference of first home buyers, you know, getting from a one bedroom into a two bedroom, maybe a single parent getting from a two bedroom into a three bedroom and a young family out of their first apartment into their first home. You know, if you look at it on a combined income as well, it doubles. So we're not talking about 50 grand. You know, for that upper income bracket it's more like 100 grand and,000 and you'll certainly move a big price point, particularly around where we are in DY.

Speaker 2: 18:46

Yeah, I agree, yep, stunning. It's really really good stuff. Making Australia great again, yeah, making DY great again. You're going to have a run in the next election. Yep, you guys look like with the little flag that's behind you and you're on your side.

Speaker 2: 19:04

Yeah, it looks like political jargon uh, but thank you so much, jack, for coming in. I really appreciate your time, that you're doing this and, guys, if you need a broker, um look um google, google zach and his details there and we'll send us a message and we'll flick you his details. But that is the landscape changing literally in the last 24 hours and you're here reporting it. Thank you very much.

Speaker 1: 19:32

Thank you, have a good one, have a good day, guys. See you boys, see you, bye, bye.