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RBA slashes homebuyer budgets by $195,500

A composite image of the RBA governor Philip Lowe and Australian currency.
RBA interest rate hikes have slashed Aussies' borrowing capacity. (Source: Getty)

The average Aussie family’s home-buying budget has shrunk by an estimated $195,500 as a result of the past six months of Reserve Bank (RBA) interest rate hikes.

New research from RateCity.com.au found a family with two kids, on a combined annual income of $150,000 before tax, could borrow $995,800 six months ago.

Once the October rate hike kicks in, their borrowing capacity will shrink to an estimated $800,300 - $195,500 less.

As the rate rises kick in, people applying for a loan will see the maximum amount they can borrow from the bank fall because they will be forced to pay more in interest.

Banks stress test potential borrowers to see if they can afford their mortgage repayments on an interest rate that’s 3 per cent above their current rate.

As interest rates get higher, this test gets harder to pass, RateCity said.

However, by April next year, if the cash rate rises to 3.60 per cent, as forecast by Westpac, the same family would be able to borrow an estimated $728,100, which is $267,700 less than they could have before the hikes began.

The calculations are estimates and assume one parent works full-time and the other part-time at half the wage.

Calculations include an annual pay rise at the start of the financial year. The exact amount someone can borrow depends on their personal situation and/or their lender.

But it's not just families who would take a hit to their borrowing capacity.

RateCity found that a single person earning $100,000 before tax in April 2022, with no dependents and no debts, would see the maximum amount they could borrow fall by $146,700 as a result of the past six RBA hikes.

By April next year, that person’s borrowing capacity could drop by a total of $202,300 if the cash rate hit 3.60 per cent.

RateCity.com.au research director Sally Tindall said rising interest rates had put Australia’s turbo-charged property market in reverse.

“Every time the RBA hikes rates, the maximum amount people can borrow from the bank takes a hit because they pay more of their salary to the bank in interest,” Tindall said.

“Already, we have seen significant drops across the country, a trend that is likely to continue over the next year as people’s buying budgets shrink further.”

Tindall said potential buyers had been putting their plans on hold until there was a more clear picture around where rates and property prices would settle.

“Some people have dropped out of the market temporarily, with a plan to get back in when prices are lower, while others are scratching their plans because they can’t afford to buy,” she said.

However it’s not all bad news, Tindall said, with the property market not expected to undergo a drastic change.

“While property prices are set to drop over the next year or two, the long-term trend is still likely to be up – something worth remembering before hitting the panic button,” she said.

“Would-be first home buyers will be looking to the forecasted drops, hoping that prices come down to a level they can afford.

“However, these buyers will have to clear the banks’ serviceability tests at higher interest rates - no mean feat in a rising rate environment.”

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