Five weeks ago we spoke about three key drivers which are set to impact lending and the property market as a result. These changes are now in effect and we’re set to see them play out with immediate effect.
The changes were:
- Government Policies
- Reserve Bank Outlook
- Proposed APRA Changes
Government Policies: Tax Cuts!
With the coalition victory, we have seen renewed confidence return to the property market. The biggest news in the past week has been that the proposed tax cut legislation has passed which means for many there will be an increase in your tax return for the F19 financial year. In theory this should help to stimulate consumer confidence and spending in the short term. This is only stage 1 of a 3 stage plan. Stage 2 is set to come in 2022 lifting some tax thresholds and delivering some further tax cuts, but Stage 3 is a significant change to the tiered tax threshold system effective July 2024. Those earning between $45K and $200K will have a flat 30% tax rate. This is quite some time off so I suspect there may be further variation closer to the date, but the headline is that for the short term; tax cuts to put more money back into the economy is a good thing.
Reserve Bank Outlook: Rate Cuts!
Only five weeks ago we were looking at there being rate cuts on the horizon, with some economists expecting up to 3 cuts in the next 12 months. There has been significant change here and we’ve seen 0.25% cuts from the RBA in both June AND July. Different lenders have passed on differing levels of the cut so it is a good time for borrowers to evaluate their current rate and ensure that they’re well placed to capitalise on the changes. The RBA cash rate now sits at 1% which is the lowest in history, and economists are predicting further cuts in the next 12 months which is astonishing. Debt will be exceedingly cheap, so there is a great opportunity to either utilize this to help create wealth, or pay it down quickly.
Proposed APRA Changes: Assessment Cuts!
This is a big one for lending in particular, where APRA announced the assessment rate floor (7% – but most lenders are at 7.25%) would be reviewed and lenders could use “actual” interest rates + 2.5% buffers. Take an owner occupied loan now at an actual rate of 3.24% – currently assessed at 7.25% could move to as low as 5.74%. We estimated it could allow up to 18% more lending capacity. Since that news, there have been some HEM (minimum household expenditure) changes which for some borrowers will actually push their borrowing capacity down, so without a material assessment rate change lending have become tighter.
Westpac group actually announced in June they are reducing the assessment rate to 6.50% for owner occupied lending, however as the consultation/review period was still in effect they had to retract this announcement within 24 hours and revert to continue to use the existing APRA floor guidance. However, this morning APRA have sent out an announcement that the new guidance is now in effective. So we may see lenders start to flow through new assessment rates. Navigating who is changing, by how much, and with what kind of lending will be the immediate challenge for borrowers, and talking to your broker will be a great way to navigate this.
Further reading on this is available below: