How Rising Interest Rates Affect Your Borrowing Power
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19 Aug, 2022
Updated: 21 Oct, 2024
How Rising Interest Rates Affect Your Borrowing Power
After months of growth, Australia’s property prices have started to fall. Unfortunately, it’s not necessarily a time to celebrate. The cost of living is rising – making it harder to save for a deposit – and interest rates are as well, so your borrowing power is probably decreasing.
With forecasts that the cash rate will likely continue to increase until at least early 2023, mortgage rates will be expected to increase also. In August, the RBA announced a cash rate of 1.85% – a 1.75 percentage point increase since May 2022 – to curb rising inflation. Rising inflation leads the Reserve Bank to increase the cash rate, which will make your interest rate higher.
Lenders pass on the higher rates to their customers with their variable-rate products. A higher interest rate means higher costs for borrowing money.
How Interest Rates Affect Borrowing Power
Your borrowing power, or borrowing capacity, is the amount of money a lender is willing to lend you for a home loan. It’s based on several factors:
- Your income
- Your assets
- Your expenses
- Your debts
- Your credit history
- The size of the deposit
- Type of loan (term and interest)
- The value of the property you want to buy
The largest factor, however, is the interest rate. And recent regulatory changes have made interest rates have an even bigger impact on borrowing power.
In October 2021, the Australian Prudential Regulation Authority (APRA) increased the minimum interest rate serviceability buffer from 2.5% to 3%. So for a home loan that has an interest rate of 3%, the APRA expects banks to assess your ability to make repayments at 6%. Here is a look at what that means for buffer rates on certain home loan amounts with a 2.99% interest rate:
| Home Loan Amount* | Interest Rate | Monthly Repayment | Buffer Rate (3%) | Monthly repayment At Buffer Rate |
|---|---|---|---|---|
| $700,000 | 2.99% | $2,947 | 5.99% | $4,192 |
| $800,0000 | 2.99% | $3,369 | 5.99% | $4,791 |
| $900,000 | 2.99% | $3,790 | 5.99% | $5,390 |
| $1 million | 2.99% | $4,211 | 5.99% | $5,989 |
*Calculations are based on our repayment calculator for a 30-year loan term.
If borrowers cannot afford to make payments calculated using the serviceability buffer rate, they will not qualify for the loan. This means that the higher the buffer rate, the less people will be able to borrow.
Once you know and understand your borrowing power:
- You know the type of properties you can afford. So your property hunt will yield better results
- You won’t waste time looking for a home that is outside your budget
- You have an idea of the size of your monthly repayments
Tips To Increase Your Borrowing Power In 2023
Your borrowing power is not fixed forever. With these tips, you might be able to boost it and move closer to buying your dream home.
- Do not ask for too much. Either the lender will reject your application or you will end up with a mortgage you can’t repay
- Check your credit score. If it’s too low, take time to improve it. If it’s just right, maintain it. If there are errors, remove them before you apply. Here’s how you can get a free credit report.
- Do not job-hop too much before you apply, as there is a chance you’ll be viewed as a risky borrower with less stable income.
- Review your spending habits and see what changes you can make to increase your borrowing power. Cut down on discretionary spending.
- Try to save a large deposit, as it indicates good saving habits and the lender will see you as a lower-risk borrower.
- If you have any credit cards, consider paying them off in full or reducing their credit limits.
- If possible, consolidate your debt so you have fewer financial obligations and can reduce your monthly expenses
- Lenders might not be able to commit to the amount you were pre-approved if rates have risen since. Re-evaluate your borrowing capacity each month.
- Adjust your expectations and look for a property within your budget.
If you are ready to buy a home, do not be discouraged – rising rates will not impede you forever. You might have to make a few adjustments, but home ownership is still possible.
Getting the right home loan for your situation can help your chances of approval. Take the help of our mortgage brokers at Home Loan Experts. Call us on 1300 889 743 or enquire online today.
