The Australian public’s newfound obsession with Reserve Bank interest rate announcements is understandable given how low rates have been in the past decade.
Commentators wax lyrical about the cash rate’s movement and will translate what each monthly shift means for the average mortgage holder’s hip pocket. It is a compelling measure when living costs are rising and times are tight.
But what about those who are in the market and yet to secure a loan? What has happened to their ability to borrow?
A business associate of mine, Ryan Sweeney at MortgageWorks, ran some numbers to demonstrate exactly how interest rate increases are impacting one of his potential borrowers.
What’s your borrowing capacity?
Ryan ran scenarios for his client across six major lenders. The data demonstrates just how far this client’s borrowing has been eroded by interest rate increases so far this year. Ryan also calculated the client’s borrowing capacity if the cash rate climbs to a predicted 2.85 per cent by the year’s end. It’s a telling dataset:
| Client A – Maximum Borrowing Capacity | |||
| Cash rate | (Jan 22) 0.10% | (Aug 22) 1.85% | (Dec 22*) 2.85% |
| Lender’s interest rate | 1.99% | 3.79% | 4.75% |
| Macquarie | $ 1,085,000 | $ 926,084 | $ 940,931 |
| Westpac | $ 1,123,000 | $ 934,082 | $ 846,300 |
| St George | $ 1,122,000 | $ 933,729 | $ 845,742 |
| Commonwealth | $ 1,090,000 | $ 928,564 | $ 840,717 |
| ANZ | $ 1,114,620 | $ 933,230 | $ 844,741 |
| NAB | $ 1,130,000 | $ 924,640 | $ 846,416 |
| Average | $ 1,110,770 | $ 930,055 | $ 860,808 |
*predicted
This borrower’s average approvable loan amount has fallen by $180,715 since the start of the year which equates to a 16.2 per cent drop on his January capacity. If interest rates increase to 2.85 per cent (as many predict they will) this client will see his available borrowings fall by 22.5 per cent, or $249,962, since January 2022.
The market fallout
Based on Ryan’s numbers, a client who was in the market in January for a $1.1 million home will only be able to afford $860,000 come year’s end.
Put another way, from the supply side of the market this buyer will have 22.5 per cent less to pay for a property in December 2022 compared to 12 months’ prior.
So, what does this means for markets? I see two things occurring.
Firstly, vendors will need to meet the market if they want to sell their property. It is no good holding out for 2021 prices if most of your prospective buyers are not going to be able to secure the funds required to complete a sale.
Secondly, purchasers will need to compromise on their wants and needs if their borrowing capacity is reduced. Their dream property may have been within their financial grasp in January 2022, but come December, the banks will say otherwise. It is certainly not guaranteed that prices will keep falling. Anecdotally, we have already seen price drops of anywhere between 5% – 20% from last year’s prices. So to the extent the market is affected by sentiment, the price declines may already be factored in. This means that the opportunities for buyers with reducing borrowing capacities may not be any more fruitful than they are today.
Compromises worth making
The key for purchasers is to understand that when your available dollars are lower, there are some factors you must compromise on, and others that you should stay steadfast on.
For example, you might choose to buy a property in less-than-ideal renovated condition. It may not have the perfect finishes, or it may need new carpets and paintwork. That said, if the property has the right bones, and you can address renovations later, it could be your best buy for now.
Or perhaps it is a case of securing a smaller property or one with less land content. The utility of the property’s floor plan will play a major role here. A three-bedroom property can feel more spacious than some four-bedders when the layout is thoughtfully planned.
You might also compromise on property type. If your heart is set on living in a particular suburb, but houses are now outside your budget, perhaps a townhouse will meet your needs?
Of course, there are some elements you should not compromise on when it comes to property. Location is unchangeable. Buying in a desirable, blue-chip neighbourhood with excellent services and facilities is essential. It will boost your lifestyle and secure long-term capital growth.
In addition, position is an important factor. Avoid secondary positions such as on main roads or being next to a service station as this will prove beneficial as the years pass.
Buying the right property when your borrowing capacity is reduced can present a huge challenge. Choosing exactly where to make compromises is confounding and exhausting. You want to fulfill your family’s needs and ensure long-term financial security but must now do so on a lower budget. This is where an experienced buyer’s agent can help. We know how to stretch your limited dollar to the maximum when it comes to property purchases. Through our comprehensive due diligence, extensive networks, and expert negotiation skills, we can ensure you get the most bang for buck from your tighter borrowing situation.
