Interest cuts, tax cuts and reduced restrictions on lending – Is it time to act?

The first week of financial year 2020 couldn’t have been bigger for those looking to pay less tax, maximise their disposable income AND build wealth through property!

Here is a recap of the key events of the week ending 5 July 2019…

Tuesday July 2nd – Reserve Bank Cuts Interest Rates for the Second Time in a Month

Of course interest rate cuts occur when concerns exist over the current state of the economy, and that is clearly the case right now.  But there is no denying, for everyday Australians who own property and who are using debt to fund their wealth building activities, rate cuts are very good news.

So Tuesday’s cut of 25 basis points, on top of the 25 basis point cut last month, means significantly less interest to be paid on bank loans, and therefore either more disposable income in your pocket, or increased principle reductions.

How much better off you will be will depend on which bank you are with, and the size and type of your loan.

But on average the banks have passed on 88% of the rate cuts!

And this really isn’t too bad, as we all know they rarely pass all of a rate cut on to their customers.

And it means somewhere around $1,800pa in less interest, and therefore in extra cash in your pocket, if you have a $400,000 loan.

Or if your loan is $1m, the interest saving is more like $4,400pa!


Thursday July 4th – The Governments Tax Cuts Have Passed After Much Anticipation

Scott Morrison and the Coalition’s Federal Budget and Election tax cuts policy became a reality late Thursday afternoon Perth time.

Declared by the Prime Minister as “a victory for quiet Australians”, the cuts are the biggest in recent memory and a significant reshaping of the way Australians are taxed, or they will be…

In the short term, the only thing that really changes, though it is still a pretty big deal for most, is an extra tax offset in your next tax return.

This means –

  • Those earning less than $37,000 will receive a ‘bonus’ $255 offset.
  • Those earning between $37,000 and $90,000 will receive a very welcome $1,080.
  • Even those earning up to $126,000 will still receive a part offset.

Then things start to get serious…

First, over the coming years, tax rate changes as well as threshold changes will kick in, initially providing much needed relief from ‘bracket creep’ for many.

Then it all culminates in July 2024, when an estimated 94% of the population will begin to enjoy a maximum marginal tax rate of just 30% (plus Medicare Levy)!

(Oh, and coupled with the company tax rate cuts, a genuine reduction in annual tax bills will start to be felt by many, especially our business owner CapitalQ Community Members.)


Friday July 5th – The Bank Regulator, APRA, Relaxes its Restrictions on Banks when Lending to Home Buyers

This announcement was the clear cherry on top for anyone looking to buy their first home, to upgrade, or even to add to their property portfolio…

Many were very pleased to learn that in a letter to banks and other lenders issued on Friday morning, the Australian Prudential Regulation Authority, the primary regulators of the banking industry, relaxed the rules banks are required to follow when assessing how much a borrower can borrow.

Prior to the letter, banks were required to use an assumed interest rate of 7% when assessing how much someone can borrow.

And frustratingly for many was the fact that this was the case even though the actual interest rate they would be paying was substantially lower.

However now banks will be required to add just a 2.5% buffer to the rate that the borrower will actually pay when assessing their ability to repay the loan.

Media are reporting this will see an average single individual now being able to borrow around $50,000 more.

For couples and families with dual incomes, the additional amount will likely be much higher.

But we would argue more importantly for all those of us who are conservative when deciding how much to borrow, regardless of what the banks say they will give us, we will find securing approval for a new loan substantially easier than has been the case in recent, highly frustrating, times!