Hidden $134k bonus in rate cuts

As restrictive monetary policy is unwound, hopeful homebuyers will be able to purchase larger mortgages. Picture: NCA NewsWire/ Gaye Gerard

Potential homebuyers would see their borrowing power surge by tens of thousands of dollars if the Reserve Bank delivers just three rate cuts, new analysis has revealed.

As the cost of holding debt has steadily increased under the RBA’s run of 13 rate hikes, the amount of credit banks can issue has fallen substantially, paring back the borrowing power of those seeking to purchase a home.

However, as the monetary tightening to date is unwound, this trend is set to be reversed, allowing mortgagors to take on greater liabilities.

Borrowers will be able to purchase larger home loans when the Reserve Bank cuts interest rates. Picture: NCA NewsWire / David Swift

According to analysis from financial comparison website Canstar, after just three 25 basis point rate cuts, owner-occupiers purchasing a mortgage would enjoy a significant boost in their borrowing power.

For a single borrower taking home an average yearly income of $98,281, the amount they could borrow after 75 basis points worth would increase to $419,000, up $27,000.

Currently, a single borrower would be able to purchase a loan worth $392,000.

A couple with one partner working full-time, the other partner working halftime and both paid average earnings, would benefit from a $45,000 increase in their borrowing power, enabling them to take out a $683,000 loan.

Meanwhile, a couple both taking home average full-time earnings would see their borrowing power increase by $63,000 to $969,000, should three rate cuts materialise.

Money markets are fully priced for only one cut this year. Sydney. Picture: NCA NewsWire / Dylan Coker

Canstar’s analysis assumes the buyer is purchasing a 30-year loan with a variable interest rate of 6.27 per cent and has average annual expenses for their income cohort.

However, economists and money markets anticipate it will be some time yet before borrowers will see any benefit as the central bank lags behind its international peers due to still stubborn inflationary pressures and the red hot jobs market.

Bond traders ascribe a 100 per cent chance that the central bank will deliver a 25 basis point decrease in interest rates at its September meeting, and a 77 per cent chance of a follow up cut at its final meeting of the year, scheduled for December.