$23,000 less: RBA hike to shrink homebuyer budgets
Aussie couples will be able to borrow $23,000 less from the banks if the Reserve Bank increases interest rates next week.
Rate rises have decimated home buyers’ borrowing power, with further increases set to bring more pain.
The Reserve Bank of Australia (RBA) is expected to raise interest rates by 0.25 per cent when it meets next Tuesday, following higher-than-expected inflation figures. This would bring the cash rate to 3.35 per cent, the highest it has been in more than a decade.
According to Canstar analysis, this would shrink the average single’s borrowing power by a further $10,000, allowing them to borrow just $425,000. In total, it would reduce their overall borrowing power by $143,000 since the rate hikes started in April.
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For dual-income couples, a February rate rise would see a further $23,000 cut from their buying budget, reducing it by a total of $329,000 since April to a loan size of $980,000.
Canstar finance expert Steve Mickenbecker said higher interest rates and repayments had now become the major impediment for first home buyers, as property prices began to soften.
“First home buyers are the one group that will welcome a house price fall, but with each further 0.25 per cent interest rate increase, the borrowing capacity of an average income earner falls by around $10,000,” Mickenbecker said.
“With another couple of rate increases expected before a pause, it is two steps forward and one back.”
To keep pace with diminishing borrowing power, Mickenbecker said homebuyers would need to “go back to the drawing board” and rethink their property expectations.
But there are also some proactive steps homebuyers can take to potentially boost their borrowing power.
3 tips to boost borrowing power
Firstly, take a look at your unused credit card limits. Your credit card limit is the maximum amount of money you can charge on a card and it’s something lenders look at when assessing your borrowing power.
“An unused credit card limit may sound like a safety net, but it can actually work the other way and reduce borrowing power,” Mickenbecker said.
A home loan’s interest rate can also have a sizeable impact on the amount of money you can borrow. According to Canstar, there is a 1.42 per cent difference between the average and lowest-rate home loan, so it’s worth shopping around.
“Borrowers can effectively avoid almost half of the loss of purchasing power by choosing a lower-rate loan,” Mickenbecker said.
Lastly, asking for even a slight pay rise can boost your borrowing capacity. For the average Aussie earning $92,000, Canstar found a 5 per cent pay rise could deliver $26,000 in additional borrowing power. For couples, an extra 5 per cent pay rise each, could add an extra $53,000.
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