Tax Cut Effect on Servicing

When the new tax scale changes occur will lenders immediately adjust servicing calcs?

And if so I’m sure some of you have already modeled it (looking in your direction @Redom). what’s the increase to capacity for someone on 120k?

Or does it not necessarily work like that?

 

Yes it would improve servicing all other things being equal.

 

Net positive.

It reduces negative gearing by a little (that's a negative) but the additional income is at least twice as much.

 

It will be good for FHB, in fact, almost all policies now a days favour FHB massively. If you got 1 or 2 investment properties are still fine. But if you got anything more than 3 and above is getting a massive hit to your serviceability.

 

If this is what is being proposed ( see below ) the effect will be modest . For those carrying debt already , this will barely make a dent . For someone on 120k Gross , an extra $1665 per annum isn’t going to transform borrowing capacity. Generally speaking , increases in income need to be tens of thousands to make a material difference to borrowing capacity for investors - especially those carrying IO debt . It depends how close you are to a ceiling already of course , but this tax cut isn’t going to create waves of new buyers

Sensitised + P&I remaining term . Those words are the game changer for investors . They replaced “actuals” and the change of policy sucks out way more than either tax cuts or rate cuts put back in - even after the concession on floor rates last year. Anyone telling you otherwise is wrong . Sorry . Just dead wrong .
Owner Occupiers with no other debt may be cooking with gas . Investors with IO debt are certainly not .

 

Yeah I agree with @euro73, look at the savings in the top tax bracket. It's barely anything.

 

Hey @euro73,
I understand what you me saying but just for simplicity I’m just interested to know what a vanilla owner occ buyer on 120k with no other debt would have their capacity increased by on your modeling?

 

No much. For most the increase in borrowing capacity will be less than $20k.

 

Roughly 6x the annual tax savings

 

It appears that the reductions to income tax being reported pre budget are not quite as they seem. It is being reported this morning that the budget papers slightly overstated the tax savings as they are based on a comparison with 2017/18 tax rates. If the reporting is true, then the effect for someone earning 120K will be $2413 when compared with current 2020/21 tax rates , rather than $2745 based on 2017/18 tax rates.



To make things simple I'm going to use a very basic calculation framework

Single applicant.
0 dependents.
Conservative Living Expenses $2500 per month
$0 credit card, personal loans, etc...
120K Gross
Then, I will add $3500 of GROSS income to the equation , which should result in @ 2500 of additional NET income . ( ie $123,500 rather than $120,000 )
All loans are P&I variable O/Occ with 30 year loan terms


AMP using 120K Gross. $840,615
AMP using 123.5K Gross $872,835
Increase of $32,220
FYI Neither would actually pass servicing though , as DTI is above 6 and surplus is less than $500 per month . AMP requires any deal with a DTI above 6 to pass by $500 minimum per month. But if we ignored that rule for a moment , these figures are where the calc tops out for 120K and 123.5K respectively




Macquarie Bank using 120K Gross $835,922
Macquarie Bank using 123.5K Gross $867,961
Increase of $32,041
DTI ratio well above 6 on this one as well



NAB using 120K Gross $817,366
NAB using 123.5K Gross $848,701
Increase of $31,335
DTI ratio well above 6 on this one as well



I have only done 3 lender comparisons and to be fair, they are current calculators with current tax rate macros so they arent certain to be absolutely accurate. But I have tried to artificially create the effect of the tax changes by adding $3500 of gross income so I am confident the numbers will be there or thereabouts . These results demonstrate what I have said repeatedly previously.... hardly any change. Modest impacts at best. The word "modest" is probably being kind, really. Those suggesting otherwise are going to be disappointed. The very modest increases to borrowing capacity are certainly not enough to produce purchasing power miracles, all of a sudden

I have also stated that it's unlikely the proposed removal of responsible lending requirements will set borrowing capacity alight for most. Unless it happens in concert with the removal of sensitised P&I assessment rates it's effect will likely be quite limited for most. Yes, it may add some capacity to some borrowers, and it will definitely speed up turn around times at lenders , but to truly change the game you need SPARTA

Sensitised
Principal
And interest
Remaining
Term
Abandoned

 

Tax cuts on their own doesn't set the world alight to borrowing capacities, they do have quite a notable improvement though as euro's pointed out. USER=241]@euro73[/USER] modelling shows a 30k jump on tax cuts alone. You can double that impact for households too, and you end up with a 60-80k improvement in BC's (~10%). Stage 3 would be quite the impact on larger income households given the size of them.

Throw in a 15-25% improvement from sensitisation changes in the last year, there's been a very large change in borrowing capacities across the lending spectrum for the marketplace. Overall, since mid 2019, the lending pendulum from regulators has swung from a period of tightening to a period of loosening. 2020 saw some credit related risk tightening from risk conscious banks (normal given recession). 2021 will continue the theme of tweaking the dial to promote leverage further. Unsurprisingly, its corresponded with another growth cycle (interrupted by Covid19).

 

That's only for salaries of 120K + though, to be fair
Increases to borrowing capacity will be far less for those earning salaries of between 100,000 - 119,999 as the tax reduction is 1503 per annum rather than 2413 per annum...
And less still for salaries between 60,000 - 99,999 where tax savings are 1053 per annum

That's only a fair statement if all households have two salaries of 120K + . Average Weekly Earnings, Australia, May 2020

That's already accounted for in the results though. ie that sugar hit is already spent

Possibly. But we really don't know what the impact may be without weighing other factors such as
what happens when mortgage deferments cease?
what happens when jobkeeper and jobseeker are withdrawn?
what will happen with the responsible lending stuff Frydenberg has proposed?
All unknowns... and important enough that their potential impact shouldn't be discounted.

 

All true @euro73.

Interesting how different people view the same numbers.

I see credit markets allowing space for AMPLE room for very substantial price growth available now from that same leverage modelling. That is a very very high borrowing capacity amount for a single person to purchase their own home.

Across the forums you've noted borrowing capacity amounts being more restrictive today vs 2015. There's certainly elements of truth in this description, particularly when it comes to obtaining loans, processing, timeframes, advanced investors, etc. One worthwhile clarification to note for PC community who like to understand broader market conditions is 'how does leveraging work' today for different groups. This helps understand price drivers too, even if it doesn't relate to an advanced investors personal situation.

Interestingly, if you compare this exact SAME persons credit offer in 2015 vs 2020 --- it looks far far more favourable today than it did 'APRA actuals' days.

2020:
$120k income (a little higher with tax decreases noted)
BC: ~$850-870k borrowing amounts from your calc
Rate: Early 2%
Mortgage repayment: ~$3.2k per month.

2015:
$120k 2020 real income (equals ~$110k nominal)
BC: ~$680k (~$80k net yearly, less $24k in living expenses, with ~$56k yearly extrapolated at 30 years at 7.25% = ~$680k).
Rate: ~5%
Mortgage repayment on $680k: ~$3,650

In 2020, the same person is offered an additional $170k in mortgage debt, and the total debt servicing repayment (on P&I) is ~10% lower. The actual interest cost is nearly half too (~$1550 on a ~$850k loan size vs ~$2883 on a ~$680k loan size).

 

That’s all well and good of course, but that sugar hit to borrowing capacity has already happened and already flowed through lender calcs and already been spent. Its a year old news. When the post election rate cuts ( June, July and October 2019 ) and APRA floor rate reductions ( May/June 2019) occurred in concert over a year ago ... approaching 18 months actually ..... I said at the time that I thought that's exactly what would happen... it would provide a 15-20% sugar hit to borrowing capacity for owner occupiers and no real improvement for investors whatsoever, other than to help avoid the P&I cliff.... which I had said a year or so earlier would require rate reductions as a cushion...

But we both know that we aren’t talking about owner occupiers with no other debt when we have these conversations The pre and post APRA numbers for anyone other than owner occ buyers without any other debts tells a very different story to what clean skin owner occupiers can achieve.
Granted, clean skins have more firepower....but everyone else does not. Compare just about any scenario of pre APRA v post APRA outcomes for anyone carrying a few hundred K of IO INV debt as well as a P&I O/Occ debt and it's clear as day
Look, I'm all for getting wealthier. But I don't see where the endless borrowing capacity increases are going to come from to drive ever more growth now that we have no rate cuts left and no wage growth on the horizon.... unless we get investors back in the game. Cleanskin Owner Occupiers ( whether FHB or upgraders or downsizers) are not going to provide an infinite source of new buyers - especially with migration ceased. And with homebuilder and FHOG and FHLDS doing all they can to bring the next 5 years worth of buyers forward ..... what happens when that pool of buyers is done? we will surely need new ones to keep momentum flowing, no? And they will have to come from existing buyers with existing debt, no? And that's going to require SPARTA or partial sparta .... or sparta lite ..... no? 'Cos tax cuts wont do it.

Some welcome news from WBC today about a lower floor rate of 5.05%.... AMP did something similar last week by reducing to 5.25% . These "SPARTA lite" types of changes will aid capacity more than the tax cuts will... but all these little tweaks still wont bring investor firepower back in the way people are hoping.... and loan numbers published today show that loan volumes are still dominated by churn/musical chairs Cash back driven refinances make up more than 3 in 4 loans being written everywhere .... not much new business to speak of.. and bugger all of it is new investor business, pretty much. The sugar hit is well and truly in the cleanskin owner occ space only.... so far at least

 

Pimple on a mountain

 

What's this I hear some lenders are adjusting their floor rates even further?
More Sugar Hits Coming....

 

I thought APRA impositions don't allow that anymore?

 

APRA APG 223 has no floor rate set. It is one area that's left grey and open for interpretation by banks. Floor rates will all be around 5% soon.

Once responsible lending goes, we'll see more and more essentially adjust the floor rate to be 2.5% above the market rate.

 

yes please