Josh Frydenberg can’t have his lamington and eat it too
The current average variable mortgage rate is 3.32%, according to the comparison website Finder. An average NSW homebuyer who took out a loan late last year would pay $3,970 a month to service their new mortgage. If a modest 25 basis point increase in the cash rate were fully passed on by the banks, bringing the rate for our typical borrowers to 3.57%, monthly repayments would increase by $108 per month to $4,078. The tax offset is worth $90 per month.
In other words, removing the LMITO and maintaining the lower rates of 0.25% would earn this hypothetical household a benefit of $216 over the year, provided they were eligible for the maximum compensation.
In Victoria, repayments at the current average variable mortgage rate are $3,235 for a new loan. A 25 basis point hike would push monthly repayments up $88 to $3,323. This household would be better off keeping the lamington (about $24) than going without. But if rates were to rise even a little more, that saving would quickly disappear.
The national average loan size for an owner-occupied home was a record $602,000 in December. At a rate of 3.32%, the principal and interest repayment would be $2,956. At 3.57%, that jumps to $3,037, or about $81 more each month.
Financial markets are anticipating a full one percentage point increase by the end of the year under current economic conditions. This excludes any additional spending by the federal government. This would see mortgage repayments increase by around $440 per month in New South Wales and $360 per month in Victoria.
At the same time, property values are expected to start falling later this year, heightening concerns for homeowners and buyers. National Australia Bank expects prices to fall by more than 11% in Sydney and Melbourne next year, with smaller falls in Brisbane, Adelaide, Perth and Hobart.
Westpac expects home values in Sydney and Melbourne to fall 9% in 2023.
Chris Richardson, partner at Deloitte Access Economics, said the LMITO was equivalent to “a bit more of a rate hike”, or about a third of a percentage point on rates.
“Consolidating the lamington more in place would be a compromise… It would be good for low to middle income people [taxpayers] but that would be a bad thing for those who have a mortgage,” he said.
The latest census data available shows that around one-third of homes are owned, one-third are paid for and one-third are rented. Homeowners and buyers tend to be wealthier on average than renters.
Mr Richardson noted that the tax refund was not only received by low-wage workers, but also by wealthier people, as the offset is applied to income and there are many ways people reduce their taxable income.
“The economy is rebounding strongly and we are in a phase where we have to talk about the supports to be withdrawn,” Mr Richardson said. “It’s the world of compromises.”
It remains to be seen what compromise the treasurer will choose.