Mortgage crisis: Home buyers caught out as borrowing power falls faster than property prices

Soaring rate rises are slashing hundreds of thousands from homebuyers’ budgets. See how your borrowing power has changed and where you can afford.

Lee Vella and Sarah Godenzi are hoping a big result when their 22 Bowmore St, Hughesdale, home goes to auction Saturday will offset a borrowing capacity crunch.

Melbourne’s battlers have been blown out of the city’s housing market as soaring interest rate rises slash hundreds of thousands from homebuyers’ budgets.

PropTrack research shows finances are falling faster than property prices, with borrowing capacities taking a six-figure (20 per cent) hit since the Reserve Bank of Australia first raised interest rates in May this year.

Leading property experts and brokers are advising battler buyers to “buckle in for a long train ride” so they can buy in regional hubs, to give up on a house and buy a unit instead or even to hope for a pay rise.

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An expected 0.5 per cent hike to mortgage costs on Tuesday will leave a buyer who could have got a $500,000 loan in April able to access as little as $383,000 from the banks.

With the city’s cheapest suburb, Melton, hitting a $500,000 median house price at the end of August, even those buyers with a $100,000 (20 per cent) deposit would come up short.

That same buyer would have had access to 17 Melbourne suburbs including Werribee, Frankston North, Broadmeadows and Millgrove in April.

PropTrack economist Angus Moore said every further 0.5 per cent hike by the RBA translated to an about 5 per cent reduction in borrowing capacity.

“Regardless of what you were planning to borrow, you have probably pulled back,” Mr Moore said.

“And to date we haven’t seen home prices fall by anywhere near as much as borrowing capacity, and I don’t know that we will see them fall to match that decline.”

He added that both search activity and generally stronger property prices for more affordable homes indicated buyers were increasingly seeking out budget options as the rising rates smashed their budgets.

33 Lakewood Boulevard, Melton, is seeking $419,000-$459,000 and is among the most affordable houses in Melbourne.

Real Estate Buyers Agents Association of Australia president Cate Bakos said families hoping to upgrade their home had been hit hard.

Ms Bakos said while most of these buyers would have been in at least the $750,000 borrowing bracket back in April, they were potentially being forced out of areas where they already had kids in schools and kindergartens.

She added that she was now advising some buyers to pay off car loans, to wait for their partner to return to work after having kids or even to wait for a pay rise before trying to buy. Those with more modest budgets might need to take more extreme action.

9 Magellan Cres, Werribee, is listed for $549,000-$579,000.

“These buyers might have to buckle in for a long train ride and consider locations like Geelong, Ballarat or Bendigo; or reduce their expectations to a unit,” Ms Bakos said.

In Melbourne’s west, HockingStuart Werribee’s Samantha McCarthy said she had already watched a buyer with pre-approved finance purchase, only for the RBA to raise rates while their bank was assessing the loan leading to it being rejected.

“They had to walk away, and that was disheartening for the vendors — and the buyer was shattered,” Ms McCarthy said.

Barry Plant Melton partner Ned Nikolic said some people who had planned to build in Melbourne’s most affordable hub had found they could no longer afford it by the time their land settled.

“I’ve been selling in Melton for 15 years and we have never had so many people coming here,” Mr Nikolic said.

“But people who are priced out of other suburbs, they have to come here.”

Lee Vella and Sarah Godenzi at the 22 Bowmore St, Hughesdale, home they renovated during the pandemic.

The exterior of the home.

After renovating their 22 Bowmore St, Hughesdale, home across the pandemic, Lee Vella and Sarah Godenzi looked at selling it in April with a view to finding their next project.

The Art Deco address was extended and impressively renovated with everything from limestone benchtops, underfloor heating and skylights added in.

But with both self employed, Ms Godenzi as a wedding photographer at Sarah Godenzi Photography, and their industries “essentially flattened” by lockdowns they found their borrowing capacity was well short of what they had hoped for.

Inside the couple’s remarkable renovation project that they hope will save them from the worst impacts of a home lending crunch being caused by rising interest rates.

As rates continued to rise they made the call to put their home under the hammer at 10.30am Saturday, with the hopes of finding a bargain on a home in need of so much work nobody else wants it, giving them a chance to negotiate the price down.

“We’re now looking at different areas and our renovation is what is saving us because we did a lot of the work ourselves and renovated homes seem to be in demand so we should have a bit of equity,” Mr Vella said.

Ms Godenzi said they had been thinking they could take until Christmas to find their next home, but would today rush from their own auction to try and buy a home immediately after.

“If the rates keep going up we will have to buy fairly quickly,” she said.

Loan Market mortgage broker Jacob Decru said first-home buyer numbers had fallen in recent months, but some were pushing ahead by seeking lenders offering lower rates or to go for a variable rather than a fixed rate.

A different lender or loan product might help boost your borrowing power.

Mr Decru warned not all lenders were honouring pre-approvals, and buyers should be regularly reconfirming their loan cap.

MortgageChoice Malvern-based broker Sally Richards said even in Melbourne’s more affluent markets buyers were having to reassess long-term retirement plans as their intention to retain their first-home as an investment became untenable amid the rate hikes, despite a high income.

Ms Richards said those who had a $500,000 budget in April would have likely been families with about $100,000 in household income or even first-home buyers in their 40s earning $70,000-$80,000 – and some were now saying they were looking to regional areas.

Those who would have been able to borrow $750,000 in April were likely to be professional couples looking for a first home or middle-income families looking to upgrade — both now looking at more modest homes or areas they hadn’t previously considered.

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