No relief from RBA but home buyers can boost their borrowing capacity themselves

Home buyers looking to boost their borrowing capacity may need to take the microscope to their finances after the RBA hiked the cash rate once again on Tuesday.

The tenth rate hike in as many meetings comes after the banking regulator, APRA, confirmed last month it would not be reducing the current 3 per cent serviceability test to free up home buyers’ borrowing capacity.

Banks are currently required to stress test mortgage applications to make sure borrowers can still afford the repayments if rates rose 3 percentage points above the rate borrowers are applying for.

Australia’s soaring cash rate has significantly reduced how much people can borrow from the bank.

As a result, many home buyers have seen their budgets plummet in the last year, particularly those who haven’t had a decent pay rise in this time.

For example, someone earning the average wage in May 2022 has seen their maximum borrowing capacity plummet by $170,600 as a result of the hikes, assuming they haven’t had a pay rise in this time.

Source: RateCity.com.au. See notes below.

However, there are simple ways you can boost your borrowing capacity:

Increase your income: If you’re a hard-working employee, ask your boss for a pay rise. It’s an awkward 10-minute conversation but it could boost your borrowing capacity by tens of thousands of dollars. Banks often want to see three months’ of pay slips so make sure you ask well ahead of time.

Look for a low rate: Banks stress test your finances on the rate you are applying for, plus an additional 3 percentage points. This means, the lower your variable rate, the more you are likely to be able to borrow.

Some banks have bigger risk appetites than others, so understanding what a few lenders might be willing to lend you can also make a big difference. A broker is a good port of call to do a quick check on your borrowing capacity across the lenders on their panel.

Spend less and save more: The bigger your deposit is, the less you’ll need to borrow, so turbo charge your savings strategy today. A larger deposit will also help you minimise or even remove the need to pay lenders mortgage insurance. Moving back in with your parents might be your worst nightmare, but if it means getting into the property market sooner it might just be worth it. Cutting back on major expenses such as food can also make a huge difference.

Clean up your bank account: Show your bank just how frugal you can be by cutting back on your discretionary spending now. Take-away coffee, uber eats deliveries and multiple streaming services seem harmless but they are little luxuries that can go against you when you’re being assessed for a loan.

Close down your credit card accounts: A seemingly innocuous credit card has the ability to blast a hole in your borrowing capacity, even if you fastidiously pay off your balance in full each month. That’s because the banks have to assume you could max out your card, which can put a significant handbrake on how much you can borrow for your first home.

Pay down other debts: Before you apply for a loan, try to clear as much off these debts as you possibly can. Buy now, pay later spending can also raise eyebrows so it’s best to steer clear of these platforms as well.

The numbers

RateCity.com.au has crunched the numbers to see how far a single person earning the average wage could potentially boost their borrowing power.

The scenario is based on someone earning the average wage before the rate hikes who hasn’t had a pay rise since.

The person has a $10,000 credit card limit and is planning on applying for a big four bank basic variable loan with a 20 per cent deposit. They spend $2,400 in essentials each month (not including housing costs).

If this person could:

1. secure a 4.25% pay rise (RBA’s forecasted annual wages growth for end of 2023);
2. close their $10,000 credit card;
3. switch to one of the lowest variable rates for someone with a 20 per cent deposit; and,
4. cut down their expenses by 25 percent,

they could potentially borrow an estimated $137,900 more from the bank.

Single person

Earning approx average wage, no dependents, $10K credit card, $2,400 per mth expenses

For a couple the figures are amplified. If they:

1. both secured a 4.25% pay rise, having previously earned the average wage from May 2022;
2. cut up their credit cards with a combined limit of $15,000;
3. cut down their expenses from $5,000 to $4,000 (20% reduction), and, 
4. switched to a more affordable home loan with a 20% deposit,

they could potentially see their borrowing capacity increase by an estimated $280,200.

Couple

Earning average wage, no dependents, $15K credit card, $5,000 per mth expenses

Source: RateCity.com.au

Notes: Calculations are estimates based on an owner-occupier buying a property with a 20% deposit taking out a 30-year loan with no dependents. The average wage is based on the full-time adult average weekly ordinary time earning as recorded by the ABS for May 2022. Rates are based on the average big four bank basic variable rate vs the estimated lowest 3 rates on RateCity.com.au for a 20% deposit, factoring in the March RBA rate rise. Borrowing capacity is based on CBA’s serviceability calculator. Income is before tax.

The warnings

• Boosting your chances of getting approved on your home loan is one thing, but squeezing every single last dollar from the bank is incredibly risky. People need to leave something in the tank for when they hit a bump in the road.
• While buyers can take common sense steps to increase their chance of getting approved by their bank for a mortgage, they should not rely solely on the bank to tell them how much they can afford to borrow.
• Borrowers should look to keep a healthy buffer in reserve that can see you through a period of not working.

RateCity.com.au research director, Sally Tindall, said: “Borrowers can fight the rate hikes by spring cleaning their finances before applying for a home loan.”

“It’s astounding what cutting up a credit card, and cutting back on unnecessary spending can do to your chances of getting approved on a home loan,” she said.

“That said, people planning to borrow every last dollar from the bank should pause and consider the alternatives before they jump in.

“Starting smaller, opting for an investment property, waiting and saving up for a bigger deposit are options all worth considering before maxing out your borrowing capacity.

“If you are about to sign up to a new home loan, look at the debt you’re taking on and make sure you are comfortable with the mortgage repayments if rates rose a further 3 percentage points.

“While this is, at this point, unlikely in the short term, a loan is for up to 30 years and a lot can happen in this time,” she said.

Compare home loans in Australia