Q. With the passage of the Government’s Personal Income Tax cuts, what impact will this have on my take-home pay?  I am 48 years old and currently earn $80,000 a year plus Superannuation.

A. On the 4 July 2019, the Morrison Government secured passage of their Personal Income Tax cut package. The total package will see Income Tax rates cut over a six-year period with finalisation in the 2024-25 tax year.

There are two immediate changes that were passed.  An increase in the low and middle-income tax offset (LMITO) and an increase in the Medicare levy low-income thresholds.  For those earning under $37,000 the LMITO tax offset saving will be up to $255.  For those earning $37,000 to $48,000 the offset increases at a rate of 7.5% to a maximum offset of $1,080.

Further changes take effect from 1 July 2022 with a rise in the 19% personal income tax bracket from $41,000 to $45,000  and 1 July 2024 with the reduction in the 32.5% marginal tax rate to 30% in conjunction with the abolition of the 37% marginal tax rate.  The 30% marginal tax rate will apply to individuals with income up to $200,000.

Based on your income of $80,000, you will be better of by $1,080 for the 2018-2019 Tax Year. By 2024-25 your tax saving will be $1,955.

Your Medicare Levy will remain unchanged at 2%.

Q.  Our current mortgage debt is $510,000. I have seen a 3 year fixed rate of 2.99% advertised. My current variable rate loan is 4.62% p.a. Should I fix my home loan or hope that rates continue to fall?

A.  As a general principle, you should only consider fixing a home loan in the following situations; Fixed rates are lower than variable rates.  Your family’s cash flow is tight and your mortgage is of a size that if interest rates were to move, they would significantly impede your ability to service your debt. You were of the opinion that interest rates were likely to rise in the future.  Or if you wanted the certainty of knowing what your mortgage costs were likely to be.

Assuming you felt that further rate cuts were unlikely, I would only fix the portion of the loan that you felt you would not be able to repay over the length of time the loan is fixed.  For example, with your loan of $510,000, if you felt that you would be in a position to make additional payments beyond your mortgage obligation of $1,500 per month, I would fix no more than $450,000 for the 3 years and leave the remainder as variable; your extra repayments would clear the balance of the variable portion over the 3 year time frame. Under this scenario, the benefits of paying extra repayments on the loan would outweigh the higher cost of the interest rates on the variable component of the loan.

Consider making fortnightly payments on the loan as opposed to monthly payments.  This equates to an extra months’ worth of payments on the loan each year.

Establish an offset account that your income is paid into.  Link this to the variable portion of your loan.  As the name suggests, the account balance offsets the interest charged on the variable portion of your loan.  If you wish to fix a portion of your debt, establish a fixed term sub account where the repayments are made from the offset account.

A disadvantage of fixing is that you are locked in with a lender for the duration of the fixed rate period.  If you break a fixed rate loan, you may incur costs that make moving unviable.

The advertised rate appears very competitive but shop around, rates and features constantly change.  Contact your existing lender to see if they will offer better rates on your existing loan.  This may save you the expense of refinancing fees and legal costs.