Finance | 17 November 2020

How the 2020-21 Tax Cuts Might Improve Your Borrowing Power

by Carlisle Homes

Find out how the new tax cuts will help buy the house of your dreams.

The 2021 Federal Budget was handed down by the Treasurer on 7 October 2020. One of the standout features of the Budget was tax cuts for middle income earners. These were originally slated to be introduced in 2022-23 financial year but will now be available for the current 2020-21 financial year. This includes backdating them to 1 July, meaning that some taxpayers will receive an interim refund.

What does this mean for first home buyers? The tax cuts mean that you’ll be taking home more money in every pay. That increase in income might translate to a significant jump in how much you can borrow for your new build.

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As government applies tax at different rates depending on how much you earn, the tax cut will reduce your tax by lifting the threshold at which the different rates apply.

How much could you save?

The changes affect two tax brackets. The 19% threshold (the point at which you start to be taxed at 19%) rises from $37,000 to $45,000. The 32.5% tax threshold rises from $90,000 to $120,000.

Anyone earning over $37,000 will see a benefit from the changes, with the biggest winners being those earning over $90,000.

For example:

If you earn You could save
$50,000 $1080
$80,000 $1080
$100,000 $1530
$130,000 $2430

Of course, if you’re a double income family you’ll see twice the savings. Two income earners, each on $80,000, will have an extra $2160 to spend per year, or $180 per month. For earners on $120,000 each it’s a hefty $4860. That’s the equivalent of $406 per month.

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For first home buyers, the tax cuts could give you what you need to get into the property market sooner.

How much more could you borrow?

When you apply for a home loan, the bank looks at your ability to meet repayments. They do so by calculating your income after tax and then deducting expenses and existing debts. Next, they add your new mortgage and look at the amount you have left over, add a safety buffer, and then check to see that it’s enough to pay your monthly mortgage with a surplus remaining.

A couple of extra hundred dollars a month might translate to an extra $30,000 in borrowing power. If you’re saving $400, you might be looking at a difference of up to $60,000.

That can make the difference between your dream home and a compromise.

Alternatively, you might choose to keep your loan amount the same but pay it down faster with your increased income. Thanks to the magic of compound interest, you can save around $20,000 on a $400,000 mortgage by directing an extra $120 per month to the principal. With tax cuts putting more money in your monthly pay cheque, and interest rates at record lows, there’s never been a better time to apply for a home loan.

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Speak to our in-house construction finance specialists for advice on how you can utilise the tax cut to purchase your dream Carlisle home.

Ready to talk about buying a new home? Get in touch with our in-house construction finance specialists for advice on your lending power, and check out our fixed house and land packages here.

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