How have interest rate rises impacted your borrowing power?

In this environment of steadily rising interest rates, I’ve had plenty of conversations with clients about how lender criteria, serviceability and borrowing capacities have changed. If you’re considering looking to upgrade your home, buy an investment property, or perhaps just refinance your home loan, you may be surprised to discover how much less lenders will approve you to borrow compared to a few months back. While it’s not ideal news for borrowers, by speaking to an experience mortgage broker you can put yourself in a much better position. Here’s what you should know about the current lending environment and all the factors impacting borrowing.

How have the RBA’s rate rises impacted home loan rates?

Although there’s always a chance that they’ll surprise us, the experts are all in general agreement that rates will continue to rise over the coming months. With the latest September cash rate increase, we’re in turn, anticipating most banks and other lenders to follow suit and lift their rates too. While lenders don’t necessarily need to change interest rates when the RBA lifts the cash rate, generally if there’s money to be made (and a few other factors) then we can be quite certain that lender rates will also rise. This of course means that repayments will continue to increase too.

To further prove that point, after the RBA rate hike of 50 bps in August, research from Canstar found that 75 lenders increased 729 variable rates by an average of the full rate rise of 50 bps. While 25 lenders increased 379 fixed rates by an average of 38 bps.

Worth noting though, the change wasn’t an across-the-board increase, since the Canstar report also saw 25 lenders decrease 250 fixed rates by an average of 50 bps.

Rate rise impacts on repayments and additional borrowing

Impacting more than just monthly repayments and the total cost of a home loan, rate rises are also reducing the borrowing power of those looking to get a home loan. The impact on borrowing is more pronounced than you may think, which is due mostly to serviceability buffers.

What are serviceability buffers?

A serviceability buffer is a percentage that lenders add to the interest rate on offer when you apply for a home loan. These buffers are applied in order for lenders to know that you’d be able to make repayments if interest rates went up. Last October, the Australian Prudential Regulation Authority (APRA), which gives the banks buffer rate guidelines, said it expected lenders to increase the minimum serviceability buffer from 2.5% to 3%.

So, if you apply for a home loan with a 2.5% interest rate, the bank calculates your repayments as if the interest rate were 5.5% – previously, it would have been just 5% – when deciding whether to approve you for the loan.

It’s important to note that serviceability buffers differ between lenders, so the lender you select for your home loan can make a big difference to your potential for home loan approval.

The impact of serviceability on borrowing capacity

The amount a lender is willing to let you borrow for a home loan is your borrowing capacity. It depends on several different factors including income, assets, liabilities, debts, credit history, deposit amount, the property’s value – and of course, the lender’s serviceability buffer.

As the RBA raises the official cash rate, we’re seeing banks and lenders apply those rate increases to their home loan products. For those applying for a home loan, this also ends up raising the serviceability buffer and therefore makes it more challenging for a borrower to be able to ‘service’ (or make repayments on) their home loan in the eyes of a lender.

When borrowers are looking to access more finance, they can now be battling with much tighter criteria – due largely to these serviceability buffers - as interest rates go up.?

In fact, as a general rule of thumb, PropTrack economist Angus Moore has estimated that an applicant’s borrowing capacity drops by roughly 5% each time the Reserve Bank increases the cash rate by 50 basis points.

What can you do if you want to borrow now or in the near future?

For those looking to either purchase property or refinance in the coming months, it’s important to know that there are still options available.

Enlisting the help of an expert mortgage broker is extremely important in the current environment as lender criteria is constantly changing and each lender seems to have a different set of rules. As I have access to hundreds of products from over 28 different banks and lenders, there almost always a solution to help you achieve your goals – we just need to figure out what’s the right way to make it happen.

While it’s important to know that you may not be able to use a specific lender or borrow the same amount from a lender that you may have been able to use just a few months ago – all is not lost. I can help you find all the available solutions.

Let’s figure out all the options to make your borrowing goals happen

My goal is always to help you achieve your home finance goals event with these rising interest rates and tough criteria. I also want to ensure you save as much money as possible on your home loan and make the process as seamless as possible.

Call me on 0431 708 806 today or send me a LinkedIn Message to book a free no-obligation meeting or a quick chat. For more details on Mortgage Choice in Kogarah, you can visit our website.