Mortgage stress expected to fall in the wake of stage 3 tax cuts

As of April 2023, the government recognised 3.3 million people across Australia as mortgage holders. New research from Roy Morgan has revealed that 29.7 per cent (or 1,514,000) of them are at risk of mortgage stress in the three months to May 2024.

Despite nearly a third running the risk, Roy Morgan noted that this figure dropped 1.1 per cent (or 46,000 people) from the month prior, with mortgage stress at its lowest since June 2023, where it sat at 29.2 per cent.

According to Roy Morgan, there are a variety of influences helping mitigate mortgage stress. A major one is the stage 3 tax cuts, commencing 1 July. With 13.6 million Aussies expected to benefit from these changes, mortgage stress could see a reduction.

As previously reported by Mortgage Business, this initiative has the potential to boost borrowing capacity for potential home buyers.

“These tax cuts will mean there is a cohort of purchasers, who come 1 July, will increase their borrowing capacity as their net income will grow and they will have more optionality when seeking finance for a home,” said Sebastian Watkins, Aussie’s chief operating officer.

Further to the tax cuts, rising household incomes and the pause on interest rate hikes are making things easier for mortgage holders.

Roy Morgan’s CEO Michele Levine said: “The latest Roy Morgan data shows 1,514,000 mortgage holders were ‘at risk’ of mortgage stress in May 2024, down 46,000 from April, and the lowest level so far this year. The pause in rate increases since November 2023 has reduced the pressure on mortgage holders and allowed growth in several areas of the economy to ‘catch up’.

“Rising household incomes so far this year have been a significant driver of reducing mortgage stress from the highs above 1.6 million reached earlier in the year. The same reduction in mortgage stress was seen after the RBA paused rate increases for four months from July – October 2023.”

This is the first time mortgage stress has dropped below 30 per cent in 2024. For reference, the highest level of stress was recorded amid the GFC in mid-2008, reaching 35.6 per cent.

Despite inflation keeping the cost of living high, the tax cuts are expected to reduce the burden and balance out Aussie mortgage stress.

“The renewed increases in inflation in recent months have moved the official level of inflation further away from the Reserve Bank’s preferred target range of 2–3 per cent,” Levine said.

“In addition, key inflation indicators such as petrol prices remain high – for the first time in history average retail petrol prices have been above $1.80 per litre for a record 50 straight weeks – equivalent to over 11 months.

“For these reasons we have modelled an interest rate increase of +0.25 per cent in August 2024. However, although interest rate increases would normally lead to a higher level of mortgage stress, the significant Stage 3 income tax cuts due to be delivered to millions of Australians in July are set to have a larger impact on driving down mortgage stress over the next few months.”

Helping keep mortgage stress in check is the candidate-friendly employment market. As discussed by Mortgage Business sister brand HR Leader, 2024 has been a “candidate’s dream”.

Levine said: “When considering the data on mortgage stress, it is always important to appreciate that interest rates are only one of the variables that determines whether a mortgage holder is considered ‘at risk’ of mortgage stress. The stage 3 income tax cuts are set to deliver significant financial relief to many Australians in the coming weeks as take-home pay is boosted for a large majority of taxpayers – including many mortgage holders.

“As these figures indicate, the variable that has the largest impact on whether a borrower falls into the ‘At Risk’ category is related to household income – directly related to employment.

“The employment market has been exceptionally strong over the last year (the latest Roy Morgan employment estimates show 603,000 new jobs created compared to a year ago) and this has underpinned rising household incomes that have helped to moderate the increases in mortgage stress since mid-2023.”

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