Hike rates

Buyers’ borrowing power declines as banks raise rates

Rapidly rising interest rates could reduce the average family’s maximum borrowing capacity by more than $160,000 by April next year, if cash rate forecasts come true.

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

New research from RateCity.com.au has found that a family of four, where one parent works full-time and the other part-time at half pay, on a combined annual income of 150,000 $ before tax, will be able to borrow about $66,000 less following 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% as Westpac predicts, the maximum the family could borrow from the bank would be about $163,500 less than it a year ago, before the start of the increases. This will only affect people who borrow at full capacity.

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

Family Earning $150,000 Today: Maximum amount they can borrow from the bank

Maximum amount to borrow from the bank Difference with pre-hike
April 2022 (before the first hike)

$974,900

June 2022 (after the second hike)

$908,800

-$66,100

April 2023

$811,400

-$163,500

Source: RateCity.com.au. Calculations are estimates based on the ABC’s Ease of Maintenance Calculator for a family earning $150,000 before tax today, on a 30-year loan on principal and interest on the RBA New Customer Rate of 2.41% rising in line with RBA hikes in May and June, then Westpac’s cash rate forecast. Assumes the family has no additional debts and minimal expenses. Includes projected wage growth of 3.25% per year

Single 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 debt, will likely see the maximum amount they can borrow from the bank drop by around $51,000 following May’s cash rate hikes. and June.

By April next year, that 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 climbs to 2 .35%, if Westpac’s forecast comes true. This includes expected wage growth and assumes the person has minimal expenses and no debt.

Maximum amount to borrow from the bank Difference with pre-hike
April 2022 (before the first hike)

$746,900

June 2022 (after the second hike)

$695,700

-$51,200

April 2023

$618,200

-$128,700

Source: RateCity.com.au. Calculations are estimates based on the ABC’s Maintenance Capacity Calculator for a homeowner earning $100,000 pre-tax, taking out a 30-year loan paying principal and interest on the RBA new customer rate of 2 .41%, rising in line with RBA hikes in May and June and then Westpac’s cash rate forecast. Assumes the person has no additional debts and minimal expenses. Includes projected wage growth of 3.25%.

RateCity.com.au Research Director Sally Tindall said: “Rising rates have the ability to dampen the Australian property market and turn it around in the short term.

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

“The latest ABS figures show new lending is down as some buyers put their plans on hold until they have a clearer picture of where interest rates and prices of real estate land.

“The extent of the fall in prices will depend on a range of factors, including supply and demand. What is almost certain is that the cuts will not be applied uniformly across the country. Some areas will retain their value more than others.

“Anyone who was planning to borrow at full capacity could see their budget shrink significantly over the next few months as the RBA steps up its efforts to contain inflation. As a result, they may suddenly find that they cannot bid that high when future auctions.

“People who plan to borrow a moderate amount from their bank, relative to their income, may not see their budget shrink as much, if at all.

“While house prices are likely to decline over the next couple of years, the long-term trend is still likely to be up – something to remember before people hit the button. A temporary drop in equity should not worry most borrowers, provided they keep their heads down and monthly repayments increase.

“Potential first-time home buyers will look to the expected declines in the hope that house prices will finally come down to a level they can afford. However, they will have to pass the banks’ utility tests at higher interest rates, which is no small feat in a rising rate environment,” she said.