Homebuyers face a significant decrease in the amount of money they can borrow in the event of future interest rate hikes

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A rise in the official interest rate in 2022 may just be speculation for now, but a significant change in the last 90 days could indicate that it could come sooner than expected. Here’s what to do to be ready.

A rise in the official interest rate in 2022 might be speculation at this time, but in the past 90 days alone, nearly 3,000 fixed rate home loans have been raised.

With mortgage rate hikes on the horizon, potential buyers could see their borrowing power reduced by tens of thousands of dollars within months.

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The Reserve Bank of Australia will meet on Tuesday for the first time this year, but has held the cash rate steady at 0.10% since November 2020.

Throughout the pandemic, RBA Governor Philip Lowe has repeatedly asserted that he does not expect increases until the end of 2023 at the earliest.

But the real estate rumor mill has been in overdrive lately with predictions of an impending bull run.

Westpac recently announced that it expects the cash rate to reach 1.75% by 2024. The big bank was planning six interest rate hikes – in August 2022, October 2022, March 2023, June 2023, December 2023 and March 2024.

The cost of a rate hike

If the spot rate increased by 1.65% – from 0.10% to 1.75% – in just two years, the average variable interest rate would rise from 3.04% to 4.69%.

With this in mind, the comparison site Canstar analyzed the impact of a 1.65% increase in the cash rate on the estimated borrowing power of singles and couples.

According to their data, single people earning the median annual income of $77,900 could borrow $71,000 less by March 2024 if Westpac’s forecasts were correct.

This person would see their potential home loan go from $459,000 to $388,000. A couple earning the median combined income of $155,800 would see their borrowing power reduced by $169,000, from a mortgage amount of $1.09 million to $921,000.

Steve Mickenbecker, Canstar’s financial services group director, said once the RBA started raising the rate it was likely to continue.

“When the Reserve Bank hits the button on cash rate increases, history shows it doesn’t stop at one or two hikes and usually results in at least a 1.5% increase on About 18 months,” he said.

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“When the Reserve Bank raises the cash rate, you can be sure the banks will also raise home loan rates, which means higher loan repayments. For borrowers entering the real estate market or negotiating, it also means income capacity becomes stretched, meaning they are forced to borrow less.

He added that these anticipated rate hikes – coupled with APRA raising the loan affordability buffer from 2.5% to 3% in October 2021 – meant buyers’ budgets would be squeezed.

“Many borrowers only remember the drop in interest rates. This means that a drop in borrowing power will come as a shock to buyers already facing the prospect of a further house price boom.

Lenders don’t wait for the Reserve Bank

Research by another comparison site, mozo.com.au, found that there were 2,835 individual increases in fixed rate home loans from 78 providers between November 1, 2021 and January 27 this year. year.

Mozo spokesman Tom Godfrey said buyers should be aware that home lenders won’t necessarily wait for the official green light before making their own judgment on rates.

“It doesn’t matter when the RBA raises the official cash rate, the fact is that interest rates on a range of personal finance products are rising and consumers need to act to ensure they are able to meet to the new high rate environment,” he said. .

“From fixing your home loan at a rate that allows you to comfortably meet your repayment requirements, to locking in a low-risk term deposit at a decent rate to protect your cash reserves, there are measures that you can always take to prepare for the weather of higher interest rates.

Mr Godfrey said even variable rates looked set to rise in the near future.

“As wholesale funding costs continue to rise, we are likely to see the big banks raise variable interest rates this year, regardless of what the RBA decides. So it pays to test your ability to perform higher monthly repayments, compare rates and upgrade to the best value loan you can find.

How to fight rising interest rates

Although borrowing power is reduced as a result of higher interest rates, there are tactics potential buyers can adopt to increase their chances of home ownership.

“Higher interest rates are bad news for already financially strained buyers, and borrowers can learn from those who have gone through the process to give themselves the best chance of success,” Mickenbecker said.

“The Canstar survey found that pre-approving home loans is the number one tactic Australians believe contributes to property success. This allows buyers to stay realistic about their budget and ensure they are targeting the right property, and also gives them the opportunity to talk to a lender about how they could increase their borrowing power through measures such as paying off other debts,” he said.

“This was followed by avoiding auctions and making an offer before the auction or directly with the seller or estate agent. Competition for properties is intense right now, so all the homework and research you can do to boost your confidence levels is worth the investment.

Another way for first-time home buyers to combat a potential reduction in borrowing power is to consider the First-Time Home Loan Deposit Program. On January 31, the federal government released an additional 4,651 places under the FHLDS, with up to 2,326 places available for non-major banks.

Great Southern Bank’s chief customer officer, Megan Keleher, said FHLDS has already helped remove the deposit barrier for thousands of Australians.

“The FHLDS allows them to buy their home with as little as 5% down payment, without paying thousands in mortgage insurance to lenders.”

“We see firsthand the real and lasting difference this program is making to the lives of first-time homebuyers who were able to own earlier,” she said.

“With home prices rising faster than incomes, saving the deposit for a home has become an increasing challenge for more and more first-time homebuyers.”

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