Buyers borrowing power shrinks as banks hike rates

Rapidly rising interest rates could see the average family’s maximum borrowing capacity shrink by over $160,000 by April next year, if cash rate forecasts are realised.

As interest rates rise, borrowers applying for a mortgage will find the maximum amount they can borrow will decrease because they’ll be paying more interest on the loan.

New research from RateCity.com.au found a family of four, where one parent works full-time and the other part-time at half the wage, on a combined annual income of $150,000 before tax, will be able to borrow an estimated $66,000 less as a result of the May and June RBA hikes. This assumes they have no other debts and minimal expenses.

However, by April next year, if the cash rate rises to 2.35 per cent as forecast by Westpac, the maximum the family would be able to borrow from the bank would be approximately $163,500 less than a year ago, before the hikes began. This will only impact people borrowing at capacity.

These calculations are estimates only. The amount someone can borrow depends on their personal situation and/or their lender.

Family earning $150,000 today: Maximum amount they can borrow from the bank

Source: RateCity.com.au. Calculations are estimates based on CBA’s serviceability calculator for a family earning $150K before tax today, on a 30-year principal and interest loan on the RBA new customer rate of 2.41% rising in line with the May and June RBA hikes and then, Westpac’s cash rate forecasts. Assumes the family has no additional debts and minimal expenses. Includes forecasted wages growth of 3.25% p.a.

Single person earning $100,000 today: Maximum amount they can borrow from the bank

A single person, earning $100,000 before tax with no dependents and no debts is likely to see the maximum amount they can borrow from the bank drop by around $51,000 following the May and June cash rate hikes.

By April next year, this person’s borrowing capacity (the maximum amount they can borrow from the bank) could drop by a total of $128,700 as the cash rate soars to 2.35 per cent, if Westpac’s forecasts are realised. This includes forecast wages growth and assumes the person has minimal expenses and no debts.

Source: RateCity.com.au. Calculations are estimates based on CBA’s serviceability calculator for an owner-occupier earning $100K before tax, taking out a 30-year loan paying principal and interest on the RBA new customer rate of 2.41% rising in line with the May and June RBA hikes and then, Westpac’s cash rate forecasts. Assumes the person has no additional debts and minimal expenses. Includes forecasted wages growth of 3.25%.

RateCity.com.au research director, Sally Tindall, said: “Rising rates have the capacity to put the brakes on Australia’s property market and shift it into reverse in the short term.”

“We are already seeing house prices drop in Sydney, Melbourne and Canberra, with other cities likely to follow this trend in coming months,” she said.

“The latest ABS figures show new lending is on the decline, as some buyers put their plans on the shelf until they get a clearer idea of where both interest rates and property prices land.

“Just how far prices fall will depend on a range of factors, including supply and demand. What is almost certain is that the drops won’t be applied evenly across the country. Some areas will retain their value more than others.

“Anyone who was planning to borrow at capacity could see their budget shrink significantly over the next few months as the RBA ramps up its efforts to rein in inflation. As a result, they may suddenly find they can’t bid as high at future auctions.

“People planning to borrow a moderate amount from their bank, compared to their income, might not see their budget shrink as much, if at all.

“While property prices are likely to drop over the next year or two, the long-term trend is still likely to be up – something worth remembering before people hit the panic button. A temporary drop in equity shouldn’t worry most borrowers, provided they keep their head down and monthly repayments up.

“Would-be first home buyers will be looking to the forecasted drops in the hope property prices will finally come down to a level they can afford. However, they will have to clear the banks’ serviceability tests at higher interest rates, which is no mean feat in a rising rate environment,” she said.

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