Australians’ maximum home-buying budgets “have taken a hammering over the last seven months due to rising interest rates,” said Sally Tindall, RateCity.com.au research director.
As interest rates increase, the maximum amount people applying for a loan can borrow from the bank decreases because they are paying more in interest. Increased cost-of-living expenses are also having an impact.
This comes a year after APRA lifted the mortgage stress test to make sure new borrowers could handle a 3% rise to mortgage rates. The stress test before this was 2.5%. This test gets harder to pass as interest rates get higher.
RateCity.com.au research has found that seven months ago, a family with two kids and a combined annual pre-tax income of $150,000 could borrow a maximum of $995,800. That figure will be down to an estimated maximum of $781,200 once the November rate hike kicks in. That’s a drop of $214,600, or 22% less since the start of the rate hikes.
But if the cash rate rises to 3.85% by May next year, as forecast by Westpac, the same family would be able to borrow an estimated maximum of $711,700, which is $284,100 less than they could have before the hikes began. This is a massive 29% drop in potential borrowing capacity.
A single person with a $100,000 income before tax in April 2022, with no dependents and no debts, will see the maximum amount they can borrow fall by 21% or $161,400 due to the last seven RBA hikes (including November), RateCity.com.au said.
By May next year, a total of $214,900, or 28%, could be slashed from the same person’s potential borrowing capacity if the cash rate hits 3.85%.
“ABS data released this week shows the value of new lending has dropped to its lowest value in almost two years – a trend that’s likely to continue as both sellers and buyers put their plans on ice,” Tindall said. “Falling property prices will make it easier for first-home buyers to save for a deposit, one of the biggest barriers to getting into the market. However, this won’t automatically make it smooth sailing for these buyers. They’ll still need to show the bank they can repay the mortgage at a rate of over 7.5% – a difficult hurdle on a limited salary.”
Tindall said APRA “may decide to bring the stress test back down to 2.5% but it’s unlikely to rush into the decision.”
“The regulator will be looking for a clearer position of where the cash rate is likely to land before stepping in again,” she said.
