Potential rate hike could slash borrowing power by $25,000

A forecast 0.25% interest rate rise could significantly reduce the borrowing capacity of aspiring homeowners, according to new analysis by Compare the Market.

The study shows that couples on average salaries could see their borrowing power shrink by up to $25,000 if the predicted rate hike is implemented.

For a Western Australian couple, both earning the average annual income of $109,600, a 0.25% rate increase could lower their borrowing capacity from $1,164,000 to $1,139,000 – a $25,000 reduction.

Similar impacts are expected for couples in the Australian Capital Territory and Northern Territory, who could face a $24,000 decrease in borrowing power.

Victorian and Queensland couples might experience a $21,000 drop in their borrowing capacity.

David Koch, Economic Director at Compare the Market, suggests the potential rate rise could have a cooling effect on the property market.

“Demand for property remains strong, so while values aren’t likely to nosedive, a rate rise could see some pressure on budgets that gets reflected in sale prices,” Koch said.

He advised that those with deposits and pre-approvals in place might find an opportunity in the market, provided they can manage higher repayments.

“But if your borrowing power is lowered you might need to consider looking at so-called ‘bridesmaid suburbs’ that are a little bit cheaper but close to where you want to live,” Koch added.

The analysis reveals varying impacts across different states. New South Wales couples could see a $22,000 reduction in borrowing power, while South Australian couples might face a $19,000 decrease.

Koch noted that lenders have become more cautious, factoring in recession risks and potential rate increases that could affect long-term serviceability.

“The bank will stress test your finances to make sure you can survive a rate rise of up to 3%, but it’s worth having a look at that the numbers yourself,” he said.

Despite the challenges, Koch offered several tips for boosting borrowing power:

1. Reduce or eliminate credit card limits, as lenders consider the entire limit in serviceability calculations.
2. Know your credit score and work on improving it to strengthen your borrowing position.
3. Pay off existing debts, including HELP debts, which can impact borrowing capacity.
4. Consider joint purchases with family members, partners, or friends to increase borrowing power.

Koch emphasised the importance of careful financial planning in the current economic climate.

“Unfortunately, our inflation problem is stickier than chewing gum in hair, and it could more than a bit more pain to remove it,” he said.

As the Reserve Bank of Australia contemplates further rate hikes, prospective homebuyers are advised to closely monitor their financial situation and explore all available options to maximise their borrowing capacity.