Tax Cuts: Increased Borrowing Power but Heightened Mortgage Stress

Homebuyers waiting until July to purchase their homes, when the government's stage 3 tax cuts take effect, could increase their borrowing power by tens of thousands of dollars. However, this comes with a significant risk – greater mortgage stress.

Exclusive research from Canstar, based on an annual average South Australian income of $90,241 and annual expenses of $21,840, shows that a single buyer can currently borrow up to $331,000. This enables them to buy a property worth $413,750 with a 20% deposit. With the stage 3 tax cuts in July, their borrowing capacity would increase by $15,000 to $346,000, allowing them to buy a $432,500 home, $18,750 more than currently possible.

For dual-income households with expenses of $31,670 and the equivalent of 1.5 average incomes, borrowing power will increase by $21,000 under the tax cuts. Their borrowing capacity will rise from $544,000 to $565,000, increasing their purchasing power from $680,000 to $706,250.

Dual-income households with two average incomes and annual expenses of $31,670 will see an increase of $29,000 in borrowing capacity, from $778,000 to $807,000. This means they can afford homes priced up to $1.00875 million, up $36,250 from their current limit of $972,500.

Stephen Mickenbecker, Canstar's group executive finance, acknowledged that buying a home remains a challenge for single buyers. "The average income here is $5000 below Queensland's and $6000 below Victoria's, so borrowing power is lower," he said. "It will likely mean buying a home unit in an outer area of Adelaide."

For couples on two average incomes, the situation is more favorable. "You have a workable loan size and can enter the market in the inner suburbs," he added.

However, Mickenbecker warned that borrowing up to these new limits could lead to mortgage stress. According to Canstar, any loan over $343,438 will put a single buyer in mortgage stress, defined as spending more than 29.99% of gross income on loan repayments. For a couple with 1.5 incomes, the stress threshold is $515,157, while dual-income purchasers should cap their borrowing at $686,877.

These calculations are based on an average owner-occupier variable loan with an 80% loan-to-value ratio (LVR), a 30-year term, and a 3% interest rate buffer.

James Packham, managing director of Harcourts Packham, noted that housing crisis discussions are a key focus ahead of the 2025 election. He encouraged hopeful buyers to seek professional advice. "Proposed housing policies are expected to shape the future dynamics of the real estate market, offering potential solutions to current challenges," he said. "Personalized solutions and expert guidance are invaluable for navigating the competitive market."

Cedar McGearey, 27, from Hectorville, is currently renting with their partner and daughter. They expressed concern about their ability to save for a deposit despite the prospect of increased borrowing power. "We're already spending more than a third of our income on rent. With the cost of living rising, saving for a deposit seems almost impossible," they said.