Yahoo Finance $160k less: Rising interest rates are shrinking your borrowing capacity
Rising interest rates could shrink the average family’s borrowing capacity to buy a new home by as much as $163,000.
Numbers crunched by RateCity found that if the official cash rate rose to 2.35 per cent in April next year, as predicted by Westpac, a family of four on a combined annual income of $150,000 would be able to borrow around $163,500 less from the bank.
While rising interest rates limit the amount borrowers can access - because they need to pay more interest on the loan - hiking interest rates also tends to slow down property price growth.
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“We are already seeing house prices drop in Sydney, Melbourne and Canberra, with other cities likely to follow this trend in coming months,” RateCity research director Sally Tindall 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.”
At the same time, she said people planning to borrow at capacity could see their budget shrink significantly as interest rates rose.
As a result of the latest rate hikes in May and June, the same family of four on a combined annual income of $150,000 before tax would be able to borrow around $66,000 less, assuming they had no other debts and minimal expenses.
A single person with no dependents and no debts would likely see their borrowing capacity shrink by $52,000 following the most recent cash rate hikes.
Come April next year, the maximum amount this person could afford could drop by a total of $128,700 if the Reserve Bank continued to hike rates as expected.
However, Tindall said 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”.
She also said that while property prices were tipped to drop in the next few years, the long-term trend was for property prices to continue growing.
“A temporary drop in equity shouldn’t worry most borrowers, provided they keep their head down and monthly repayments up.”
What rising interest rates mean for first home buyers
For first time buyers, rising interest rates come with both advantages and disadvantages.
On one hand, lower house prices reduce the amount people need to save for a deposit.
On the other hand, rising interest rates mean people can borrow less and have higher mortgage repayments to make.
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