Increased Borrowing Power

Jason · 00:00Welcome to episode 199 of The Numbers Game. I'm Jase, I'm joined by Nick and Marty, and if you can't tell, I'm damn excited that we're approaching that big 200 mark. The bat will be raised next week. How are you, Marty? You excited? Yeah,

Marty · 00:13settle down, mate. Settle down. You've been up and about since 120. Uh, we gotta get there.

Marty · 00:19We're gonna have a live audience. I believe all eight tickets are nearly sold out, which is, uh, absolutely tremendous. But, uh, I think they're going at five grand a pop or something like that. Love, love a ticket to a private show.

Nick · 00:31I'm pretty sure I heard today there's been some more released. Has there?

Nick · 00:36Yeah. So I think maybe we give you a mobile number out by the end of this episode and start a bidding war. What do you think?

Marty · 00:43I like it. I like it. Um, it's sort of, they're doing that, uh, overseas now and in Australia, it's sort of As we sell out, we release more. I like this. I feel like Taylor Swift at the moment, just much more prettier.

Marty · 00:55So, um, very excited, but more excited about what you got for us, Nick.

Marty · 01:00So, uh, hit us up, hit us up. What's going on?

Nick · 01:03Oh, I just want to talk about borrowing more money and how do we make that happen? I guess it's just, uh, money makes money. Marty. Isn't that what they say?

Marty · 01:12Yes. Money makes money. Unless you haven't got me.

Nick · 01:18Yeah, look, obviously we want people borrowing for the right reasons and, you know, that's why you would, uh, come to innovate or future to get good advice around why you should be borrowing. But there was, um, something that came out today, um, from APRA and APRA is the, uh, I guess the, the regulator of the banks that keeps the banks in check, uh, in relation to, to lending.

Nick · 01:40And for anyone that doesn't know, um, I think most people would, but. At the moment, if you go or in previous, um, years as well, if you went to borrow, uh, for a home loan or an investment loan, and your interest rate was 6%, the bank, bank will put a 3 percent buffer on that rate when they assess you. So

Nick · 02:00you're going to demonstrate to the bank that you can lend, um, a million dollars and hypothetically make the repayments at whatever 9 percent would be.

Nick · 02:09And that's, that's allowing for things to go wrong. So, you know, hypothetically there's interest rate increases. Um, can you serve serviceability at a higher level than what you're actually paying? There's been a lot of noise to reduce that 3 percent buffer. Any reasons why you think they would be reducing that buffer or would want that buffer reduced, particularly if you're a bank?

Jason · 02:29Well, I think Marty's got an unfair advantage at answering this question. But from my point of view, I think with interest rates getting so high, tack on another 3 percent on top of that. And all of a sudden I feel like we're, we're assessing people's serviceability at just such a stupidly high interest rate.

Jason · 02:42It's like, almost like a, uh, You know, one of those low rate MasterCards is the same rate. They're bloody assessing you for a home loan, which seems a bit, you know, a bit too far from, from what it really is. Yeah.

Marty · 02:53Yeah. Banks make money through, uh, lending money. They want to make some more. So it's, uh, yeah, that's, that's probably

Marty · 03:00the reasoning.

Marty · 03:00So, yeah.

Nick · 03:01Yeah. And you would assume, um, that it's. I think the main thing it's allowing for is a movement in interest rates, um, to go up. And obviously we've been on a pretty significant upward trend and most people would suggest we're nearly at the end of that. Um, there's obviously some debate about what the next move will be from the RBA, whether it's up or down or, or we just stay where we are, but either way, you're probably thinking, well, the rates aren't going to go up 3%, uh, anytime soon.

Nick · 03:29We're kind of at the top of the cycle. So there has been. Some push to have that 3 percent buffer dropped at least. Uh, APRA has recently come out and said, we are not, we are not dropping that. Um, we're keeping the serviceability right where it is. So I thought it'd be a good time to talk about a couple of things that people can do to make sure that they are absolutely maximizing their serviceability.

Nick · 03:53When they're looking to buy a property, whether it's for a home or, or investment. And this is not necessarily about how do I borrow the most money,

Nick · 04:00but the reality is where the, where the housing market is now and you're buying and where you're buying capacity is, they might not meet. You might need a little bit extra to be able to, you know, put your hand up at auction on the weekend to put your hand up, uh, with confidence and get the house that you want.

Nick · 04:16So there's a couple of things that you can do to make sure that you are getting the absolute maximum, uh, borrowing power. First thing is if you, and Jase this is something for you, if you've had a situation in the last six to nine months where you haven't been able to borrow as much as you wanted, one of the key things that's happened since July 1, 2024 is, uh, there's been some tax cuts introduced.

Nick · 04:42Um, so people are paying less tax, which means they've got less money in their pockets, uh, which means they've got more money left over to service debt. Um, Jace, the tax cuts, you give us a high level snapshot of those. You probably know off the top of your head. I would have

Jason · 04:59thought. Yeah, no,

Jason · 05:00definitely. So yeah, effectively it was the, the HO when, uh, we're applying.

Jason · 05:04The stage, stage 3 tax cuts. They've been happening over a number of years, but the final stage was around leveling out all the tax brackets. So, effectively trying to get more people paying less tax per tax bracket. Um, so overall for the 24 25 year, the average taxpayer. Has close to an extra 40 a week in their pocket.

Jason · 05:24So, um, you know, over, over a year, it's two to three, 4, 000 on average in, in people's pockets. Whereas the year before they would have paid that in extra tax to the tax man. So, um, you know, there was the 37 percent bracket, which is probably the biggest one that was abolished. And that was brought down to a 30 cent tax bracket up to 190, 000.

Jason · 05:44So. Um, yeah, pretty, pretty impressive.

Marty · 05:47With the, um, APRA saying they're not coming down from that 3 percent rate. Uh, do you think they're just being disciplined about, I know the mortgage arrears has sort of jumped from, well, I think it was around about 0. 5

Marty · 06:00to 1%. Um, what, what do you think the motivation in not dropping it?

Marty · 06:05Are they seeing something that we're potentially not seeing or

Nick · 06:08what's, is it the tax cuts? No, I just think it's genuine uncertainty about the economy and where where, where we actually stand at the moment. And if you think about interest rates, yep. Okay. We're probably at the top of the interest rate cycle.

Nick · 06:22Um, again, there's some argument we might get another increase, but inflation is still there and inflation is still strong. So, you know, if you, if you decrease the serviceability buffer and you let people get in and show serviceability at maybe 8 percent instead of nine, well, we might be at the top of the interest rate cycle, but what if the price of bread and milk continues to skyrocket?

Nick · 06:43What pressure does that then put? on, um, people's, um, ability to make a mortgage repayment.

Jason · 06:49And just to clarify, sorry, I had to cut in the, I said wrongly, it's an average rate of 30 cents to the dollar up to 190K. Sorry, I just had to cut in. I was running my numbers. Can I hang on? I made that sound wrong. Ah, but the

Jason · 07:00tax, yeah, the one, the one listener's just gone.

Jason · 07:03Hang on a minute. 30 cents to the dollar to 190. My accountant didn't say that. So yeah, it's after 135, 000. That's where the 30 cent bracket cuts off. Um, and up to 190, that's where you tax 37 cents of the dollar, but the point is they tried to average it out that between zero and 190, 000, if you're up to 190, 000, you're paying less than 30 cents to the dollar in tax.

Jason · 07:23So sorry to cut back in there, but just had to make sure that one listener that ran the numbers wasn't thinking they were paying more in tax than what I was saying they should be.

Nick · 07:31Relevant information. Thank you. Um, So yeah, circling back to your question, Marty, I just think it's uncertainty as to where the economy is at, um, cost of living or all these pressures that we don't know when they're going to subside, I think.

Nick · 07:45It's just playing the, or take, taking the cautious road, which is very understandable. I

Jason · 07:50still think, I think there was a lot of people that were, were impressed with the idea of removing or at least loosening the 3 percent buffer. So, you know, it makes me wonder

Jason · 08:00why are they poo pooing behind the scenes a little bit to not at least, you know, meet halfway or make it a 2 percent or a one and a half percent buffer or, or, or a floating buffer of some sort where they can, you know, have a bit more flexibility.

Nick · 08:15Yeah, I think, I think they're really worried about the arrears rate and arrears being people that are not up to date with their mortgage repayments. And at the moment it's still fairly low. Um, but the reality is the, the average. The average couple or single person has run out of money. So we don't have the savings buffers that we have, we've had in the past, particularly prior or post COVID.

Nick · 08:40So I think, I think people have had, and we've spoken about this, but they've had money to fall back on. If you look at the savings level. Um, don't quote me on this, but I'm pretty sure all the information I looked at recently said that our average savings per household is down to 0. 9 percent of our income.

Nick · 08:59Um,

Nick · 09:00whereas it was around COVID, it was sitting at somewhere between 7 and 8%, something like that. So our ability to save is diminished. If not completely gone, which means we don't have any wriggle room, which means any variation in interest rates or any variation in the price of bread and milk is going to have an impact.

Nick · 09:21So I think the worry is that when you're looking at the, um, when you're looking at the arrears rates, I don't think we've seen the worst of it yet because people had that cash buffer. So I think it's just, you know, being cautious chase, which I actually agree with, um, particularly given, you know, some of the.

Nick · 09:40Some of the levels of repayments, um, that people have at the moment. Um, I've just done some numbers just to put this into context as to what does it mean as far as the tax cuts and how much extra you could borrow. And as I said, this isn't about getting people to borrow as much as they can, but this is about being actually in the market

Nick · 10:00and being able to compete on a property that you would like.

Nick · 10:02Um, so I've got two examples here. First example is someone, um, single on 120 K per annum, which is pretty standard. And the second example is a couple earning a combined income of 280K, which is also pretty standard. Um, so let's stick to the single person first. So on 120K income, um, you are, you are netting around 7, 500 per month in income after the tax cuts.

Nick · 10:33So the, the tax cuts have allowed you, um, so if you're looking at June, 2024, fast forward. To July 2024 and onwards that individual can now borrow 642, 000 to put them in a position to buy a house, which is a 27, 000 increase on what they could prior to the tax cuts. So there's an uplift there of 27 K. It's not huge, but it's

Nick · 11:00about, you know, it's about 4 percent give or take, and it could be the difference between them getting into the property, um, that would attract a loan repayment of 4, 000 per month.

Nick · 11:10So this, so this is probably the other topic that we should be talking about. We'll maybe park this conversation until I've finished with the numbers, but someone on 120 K per annum netting 7, 500 per month, uh, in income. If they went and borrowed their maximum, which was 642, 000, 4, 000 per month in a loan repayment.

Nick · 11:32So that's over 50 percent of their salary or their net income. If you look at, uh, the second example, so the couple on a combined income of 280, 000 gross, uh, they're netting around 17, 000 per month in income. The tax cuts has increased their, their borrowing capacity by 75, 000. So they can now borrow 1.

Nick · 11:52334 million on average, which is a 75 K increase on compared to the prior to the tax

Nick · 12:00cuts, which is a significant difference.

Jason · 12:02That's that's big. That's a big difference.

Nick · 12:04Yep. Um, their repayment on that amount would be eight K per month. Um, so there you're sitting at around, you know, just over. 50 percent of, um, of net income per month again.

Nick · 12:17So for the average single person, they can now borrow an extra 27 K for the average couple, they can now borrow an average of an extra 75 K. We're pushing up to over 50 percent of the household net income going towards a home loan repayment. Let's say throw in there, you've got a car loan, you know, which might be another thousand bucks a month.

Nick · 12:39You can see why people are not saving much, you know, the cost of living insurances. All these things, um, it really makes you wonder how people are surviving when they're spending that level of, uh, money on one asset or, you know, the home loan.

Marty · 12:55I got very scared there for a minute, Nick, as you talked about those numbers, um, when you're

Marty · 13:00talking 120 and 280, and we see comments sometimes on the YouTube channel, go, you kidding yourselves?

Marty · 13:05People earn an 80 grand on average, right? A lot of people out there in their 60s trying to run a family. And I just go, you know, when you've got more surplus income, you might be able to get away with 50 percent of your income going towards a mortgage, but still pretty tough. Let alone if someone's coming in at 70s and you go 60s, it's, it's virtually criminal how people just can't get into the market.

Marty · 13:29Because They can't live because all the discretionary spending that they have to, well, it's not discretionary. They, you know, you've got food and bills and everything else that people have to pay. Um, it's pretty tough when you talk about those bigger numbers and you're going, it's tough for them. I go, far out.

Nick · 13:48And, and, and just to mention too, by no means are we suggesting this is the average person. This, this is what you're seeing, uh, from a homeline point of view. So these are people that are in the position to buy houses, not

Nick · 14:00necessarily the average punter. Um, but yeah, it is, it is scary. Um, you know, it's not many people can afford to buy a car with cash these days.

Nick · 14:10If you do, you're buying an older car, probably needs a lot of work. So people are borrowing for cars, um, school fees, all these things. It's just, um, it really is a concern. Um, given that. It's very difficult to, you know, go to the supermarket. And walk away spending less than 50 or 100 bucks these days for a meal or two.

Marty · 14:31Well, you're down to like, let's say someone is on 120 grand and they can borrow, what would you say? Six, six, something, six, six, 42, six, 42. I mean, you're really looking at a townhouse. In Melbourne, or you've got to go regionally or somewhere where you can get better bang for your buck. And I think, I think people, you know, they usually live around their work, but if they're making decisions to buy assets, maybe you do have to really think about what's the best asset you can get.

Marty · 15:00So you're still in the market building some form of wealth. Um, that you're getting good bang for your buck and that might not necessarily where you initially think it is. So you, you do have to think a lot differently out there. And I know there's places where you can buy for, you know, it's, it's limited, but 500 grand to at least get in.

Marty · 15:19You know, well, you've got

Nick · 15:20to, and you've, you've got to look at, I think you got to look at your personal circumstances too. And this, this really hit home with me. I only, yes, I had a conversation with a close friend of mine, um, is, um, is, is very comfortable, has a good business. Um, that business can operate from anywhere.

Nick · 15:39Um, he was talking about them considering a move to Perth, um, WA now, of course, WA has had a bit of a spike in property. But you can still get in there reasonably, um, cheap's not the word, but you can still find value there compared to the better suburbs in Melbourne or the ones

Nick · 16:00closer to the city. So he's, you know, Melbourne born and bred, um, got a good business, so can go where he needs to.

Nick · 16:08And he just said, look, Perth makes sense for us. We've got some, some ties there. We can. We can go there with the money we've got and actually have a really good lifestyle compared to what we're dealing with here in Melbourne. And that was, you know, this is someone I would never have picked to be leaving Melbourne.

Nick · 16:22But, you know, you've also got to sit back and look at your own personal circumstances and obviously you might need to stay in a particular area because there's family ties, but can you work somewhere else? Where's, where's, where can you provide the best lifestyle for your family, for your kids? This, this kind of stuff.

Nick · 16:39So there's a deeper conversation here, I think.

Jason · 16:42Yeah, you're right. We're definitely hearing that from our clients too. Um, you know, it's kind of tax return time, July, August, September, um, in accounting firm land, and you reconnect with your clients that you haven't spoken to necessarily for a year who, uh, you know, searching for their refund back.

Jason · 16:55And we, we've had several conversations about people saying, you know, what do you need to know

Jason · 17:00if I move house? I was like, Oh, you know, you're leaving Melbourne. Yeah, look, might head up North or might head West. Um, When, when we're saying heading North, it's not to Sydney, they're going for way further up North, better weather and, uh, escape the cost of living that we're copying in Melbourne and Sydney.

Jason · 17:15So yeah, I'm hearing it too, Nick, for sure.

Marty · 17:17But it's, it's making people ask better questions. And I think this is really important because it's, it's about living a life you want to live, not just working an obligation. And I think. And I've talked about it before, being in, you know, not a wanting, you could buy for 169 grand in 2000, right?

Marty · 17:36And you could be on 80 grand, have your, you know, have your loved one staying at home looking after your kids and you live well. And you go, it's, it's just, I shake my head and going, how are the younger people even doing it? And what does the future look like? Cause I go, that still was a very, very comfortable lifestyle.

Marty · 17:57And now I go like, when I,

Marty · 18:00when I look at that in ratios, I would have to earn nearly 1 million to have that equivalent benefit of life. Now, and I go, that's just ridiculous. In my mind, I go, that's crazy for me to duplicate that circumstance now. And I'll go, when you think about it in that lie and living that experience, you just go, that's just.

Marty · 18:26Yeah, that's just, I just don't know how those, those, those younger people doing it.

Jason · 18:31Yeah. If only our salaries went up at the same rate that the, um, you know, mortgage or the cost of the housing houses went up in Australia, that would be absolutely, uh, mind boggling. Nick, I did have an extra question for you that, um, that's a bit of crystal balling.

Jason · 18:45I think we've all heard, um, economists come out and say when they think interest rates will come down. Yeah. Um, so I'm going to throw it out there and ask you for a prediction. We don't do it too often, uh, cause you know, can come back and bite us in the bum, but this is a high level. Um, what are you seeing?

Jason · 18:59What are you

Jason · 19:00hearing? Or what are your predictions around when we might see some interest rate relief here in Australia?

Nick · 19:05Well, I, I don't think you'll definitely see them until next year. Um, there's a lot of talk, um, around the fact that maybe we haven't peaked yet. I think the data would suggest that we're seeing at the moment that, um, and here you go, um, Um, but I think that the data would suggest that the RBA should increase the rates, but when you're on the ground and you're talking to people, um, you would think the opposite, that the rates cannot go up.

Nick · 19:38So, you know, and you've, you know, you've got a, you've got differing opinions from different economists, and, Um, the one thing I will say is if we do get a rate rise, um, I think we're still pretty much at the peak of the cycle. So we might get one. Um, however, I think you need to factor in the current rates we're paying for quite some time yet

Nick · 20:00into, you know, maybe the second quarter of next year.

Nick · 20:03Um, but there's just so many things up in the air and you know, there's not, they're not budging inflation like they thought they would at this stage anyway.

Marty · 20:10Yeah. We did say the major banks, one of the major banks that I'm sure they'll follow. Thanks a lot. Break down the three year fixed rates to under six.

Marty · 20:18Um, so that's, that's a significant move suggesting the longer term outlook means rates will come down. Uh, just what I've been reading of the market, the, I think the earliest I've seen a rate cut is May 2025 with another major bank saying August of 2025. But the inflation data suggests we might get one more rate hike.

Marty · 20:42I hope that doesn't happen. US had some core inflation come out. There was a little bit higher last week than they expected. Um, cause they were thinking of cutting rates in September. Yeah. Uh, but that was slightly higher. So I hope they cut and have, have, have we follow suit. So. Bit

Nick · 21:00of doom and gloom here.

Nick · 21:01So I just want to finish on a bullish note. Um, just something I wanted to throw in there. So we're obviously talking about, we started this conversation with the assessment rate being 3%, um, and it obviously makes it difficult for people to borrow, and I've talked about APRA and APRA being the ones that regulate the banks, non bank lenders.

Nick · 21:21And there's many of them out there. There's far more non bank lenders than bank lenders and not regulated by ASIC. So they actually have the ability to go outside the 3 percent and, They still need to be responsible. Uh, sorry, not regulated by APRA. They still need to be responsible as far as lending goes, but they can be opportunistic, I think is a, is a good word to use.

Nick · 21:42So if you are in the market to buy a property and you're dealing with a major bank or a bank and serviceability is the problem, which for most people that can't get finance at the moment, that is the problem. Make sure you're looking outside the major banks. What

Nick · 22:00we're seeing now is a smaller banks bringing in some, some niches that allow them to be able to borrow or lend people more money.

Nick · 22:08So those niches could be things based around how they are assessing people's, uh, ongoing expenses, um, how they are assessing income, you know, do they take a hundred percent of your bonus? If it's regular, do they take 50%? So smaller lenders, they see, they see the problem out there at the moment, which is serviceability is a challenge.

Nick · 22:30And they want to write business. So they're looking at ways, um, to have certain policies that will allow them to lend more. So if you're dealing with a big bank and they've said no on serviceability, broaden your scope and have a look at some smaller banks, whether you do that yourself or through a broker.

Nick · 22:47But the discrepancy between max borrowing. Um, from one lender to another is quite significant at the moment, depending on the circumstance.

Jason · 22:56No, I love it, Nick. That's why you guys are the experts. And that's why we love, uh, the

Jason · 23:00extra value you bring to the podcast, Nick, Marty, and I always get an extra pep in our step when you're, uh, bringing us these exciting extra bits for our listeners to think about.

Jason · 23:07So if you've listened to the app and you have been trying to get in the market and thought there was no way stage three tax cuts might be the extra little, uh, little, uh, Bonus that you haven't thought about yet. So reach out to the innovate team, book yourself a consult, start to look at getting in the market.

Jason · 23:21If you haven't already, and if you are in the market, it might be the time to strike while other people aren't thinking about it. So it's been another episode of the numbers game, like follow, subscribe, YouTube, Spotify, Apple, where everywhere that you can find us. Uh, until next time though,

Marty · 23:36don't be scared to buy the fear.

Marty · 23:38As long as it makes sense. Game over.

Jason · 23:42This podcast is for educational and informational purposes only. The conversations are of a general nature and do not qualify as financial or tax advice. We recommend before you make any financial decisions you consult a licensed professional. Individuals on the podcast may hold positions in the companies discussed. ---