Property buyers are being warned that they may have a harder time securing the home loan approval they need if interest rates lift sooner than expected.
The Reserve Bank has kept the cash rate steady at 0.10 per cent since November 2020, however Westpac recently announced it expected the cash rate to reach 1.75 per cent by 2024 following a series of hikes.
“When the Reserve Bank hits the button on cash rate increases, history shows that it doesn’t stop at one or two hikes, and usually results in at least a 1.5 per cent increase over 18 months or so,” Canstar finance expert Steve Mickenbecker, said.
“When the Reserve Bank moves the cash rate up, you can be sure the banks will move home loan rates up too, meaning higher loan repayments.”
Canstar analysis found that if the cash rate rose by 1.65 per cent, the average variable interest rate would increase from 3.04 per cent to 4.69 per cent.
If this were to happen, single buyers on the median annual income of $77,900 could see their borrowing power reduced by $71,000 down to $388,000.
Meanwhile a couple earning the median combined income of $155,800 could see their borrowing power fall by $169,000 to $921,000.
For single buyers earning a higher annual income of $150,000, their borrowing power could reduce by $152,000 to $831,000, while a couple earning a combined $150,000 could see their borrowing power slashed by $162,000 to $885,000.
“For borrowers entering the property market or trading up, this also means the capacity of incomes becomes stretched, meaning they are forced to borrow less,” Mickenbecker said.
“Many borrowers only remember interest rates falling. This means a drop in borrowing power will come as quite a shock to buyers already facing the prospect of continuing runaway house prices.”
Mickenbecker said higher interest rates were bad news for buyers already stretched financially, and borrowers could learn from those who had been through the process to give themselves the best chance of success.
“Canstar’s survey revealed that home loan pre-approval is the number one tactic Australians believe contributes to property success,” he said.
“This keeps buyers realistic about their budget and ensures they target the right property, and also gives them the opportunity to talk to a lender about how they might increase borrowing power through moves like clearing other debt.”