What The Cash Rate Cut Means For Your Borrowing Power

The Reserve Bank of Australia (RBA) recently made headlines with its decision to lower the cash rate for the first time since November 2020.

This move has exciting implications for borrowers, particularly those looking to enter the property market. But what exactly does this rate cut mean for your borrowing power, and are there any catches? Let’s find out.

What Does A Lowered Cash Rate Mean For Borrowers?

The cash rate is essentially the interest rate at which banks borrow money from each other.

When the RBA lowers this rate, it becomes cheaper for banks to access funds. This cost reduction is often passed on to consumers in the form of lower interest rates on loans, including home loans. Historically, borrowing power has been closely tied to cash rate movements. Lower rates generally translate to increased borrowing capacity.

Following the RBA’s decision, many lenders have already announced reductions in their variable interest rates, which is good news if you are looking to borrow.

What Do The Numbers Tell You?

A decrease in interest rates directly affects the amount you can borrow. Our analysis reveals that a 25-basis-point decrease can noticeably boost your borrowing power.

For example, a couple with a combined annual income of $150,000, no dependants or liabilities, could see their borrowing capacity increase by about $17,500 on average.

This represents a 2.28% increase in their potential loan amount.

Similarly, a couple with two dependants could gain about $15,500, or a 2.27% rise in their borrowing power.

This boost in borrowing capacity is particularly beneficial for borrowers who were previously close to the limit of what they could borrow. It could be the deciding factor in making their dream home a reality.

If the RBA decides to implement further rate cuts in the future, we could see even more substantial increases in borrowing power.

It’s important to remember, however, that while this rate cut is a positive step, it doesn’t, on its own, mean a return to the peak borrowing power seen during the pandemic.

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The RBA Decision’s Impact On The Mortgage Landscape

The RBA’s decision to reduce the cash rate can mean other shifts in the mortgage landscape, beyond just an immediate impact on borrowing power.

Lenders constantly adjust their lending practices to manage risk. And if we look at history, the period of record-low interest rates in 2020-22 coincided with stricter lending policies. Borrowers faced increased documentation requirements, more thorough verification processes, and generally more stringent loan assessments.

On the contrary, the recent period of higher interest rates brought relaxed lending criteria. Some lenders even adopted a more lenient approach to income verification, such as relying on recent tax returns or bonus income, and eased savings requirements.

So, while the current rate cut increases borrowing potential, it could also lead to a tightening of lending standards.

Lenders might become more selective in their loan approvals.

This potential change in lending underscores the crucial role of mortgage brokers. As lending policies are inherently difficult to understand, a broker’s expertise is invaluable for helping you navigate if there indeed are changes.

Brokers can help you understand the current lending environment, assess your borrowing capacity, and identify the most suitable loan options for your individual circumstances. They also guide you through the application process and ensure you have all the necessary documentation to maximise your chances of approval.

Final Words

To conclude, the recent interest rate cut is a positive development for borrowers, offering a welcome boost to borrowing power. However, it’s essential to consider the broader context and the potential for changes in lending practices.

If you need help or guidance on how to navigate these changes, our mortgage experts are here to help. Call us on 1300 889 743 or enquire online.