Home buyers borrowing power slashed by $329k with interest rate rises

Rate rises have smashed the borrowing power of buyers, who have lost hundreds of thousands from their spending in just the space of eight months.

Rate hikes have decimated property buyers’ borrowing power, with a couple on average incomes having seen a whopping $300,000 wiped from how much they can spend on a home in the past eight months, with the impact only set to get more grim.

Dual income couples earning on average $184,000 will see a 0.25 per cent rate rise in February result in a further $23,000 slashed from their borrowing power.

This means how much they can spend on a home would have been reduced by a total of $329,000 since April to a loan size of $980,000, analysis from Canstar found.

Since April, those on a single income have experienced their borrowing power being cut from $568,000 down to $435,000, a total loss of $133,000.

A rate rise of 0.25 per cent in February would slice a further $10,000 off for solo buyers, cutting their borrowing power by a total of $143,000 since April 2022 with the ability to borrow just $425,000.

Borrowers may have to rethink what type of home they want to buy. Picture: Newscorp- Daily Telegraph / Gaye Gerard

But rate rises are predicted to continue past February too.

Three of the big four banks have forecast the Reserve Bank will increase rates for the ninth time since April 2022 by 0.25 per cent when it meets, taking them to 3.35 per cent.

However, ANZ and Westpac both predict the cash rate to peak at 3.85 per cent by May.

This would see solo borrowers see their overall borrowing power slashed to $407,000 while couples would be limited to borrowing $938,000 by May.

Canstar’s finance expert Steve Mickenbecker said for years first home buyers have been struggling to raise a sufficient deposit to buy into the housing market, but now things have changed.

“Just when softening property prices have somewhat eased this burden, higher interest rates and repayments have now become the major impediment,” he said.

“First home buyers are the one group that will welcome a house price fall, but with each further 0.25 per cent interest rate increase, the borrowing capacity of an average income earner falls by around $10,000.

“With another couple of rate increases expected before a pause, it is two steps forward and one back.”

Canstar's group executive financial services, Steve Mickenbecker. Picture: Supplied

Higher December quarter inflation will drive the RBA to a February decision to increase the cash rate by another 0.25 per cent, he added.

“Concern about an emerging recession overseas will eventually motivate a pause, but for now, the domestic data is the dominant factor,” he noted.

“Even if the average income earning homebuyer has put aside the normal 20 per cent deposit and can cover stamp duty and other purchase costs, loan repayment affordability at present puts a $543,000 cap on the property purchase price. This is almost $70,000 below CoreLogic’s estimated capital city median unit price of $612,308.

“A rate rise of 0.25 percentage points in February blows the gap out to $81,000.

“To keep pace with diminishing borrowing power, hopeful homebuyers will need to go back to the drawing board to reappraise their property expectations.”

People should check their credit card limits and think about reducing them. Picture: Getty Images

But he said there are also steps that homebuyers can take that will go some way to narrowing the gap.

First they should look at any high unused credit card limit, which could have a significant impact on the amount you could borrow.

Canstar’s research shows a solo buyer on an average gross income of $92,000 with a credit card limit of $10,000 could bump up their borrowing power by $49,000 if they got rid of their card or by $39,000 if they lowered their credit limit to $2000.

“An unused credit card limit may sound like a safety net, but it can actually work the

other way and reduce borrowing power,” Mr Mickenbecker said.

“Repayment of the potentially fully drawn credit card over three years is usually factored into the lender’s affordability assessment, so that you may be better off scrapping an unused card to get into your home.”

People should also shop around for the best interest rate. Picture: Newscorp-Daily Telegraph / Gaye Gerard

He also recommends shopping around for the best interest rate.

A couple with an average annual income of $184,000 who applies for a loan with

a lender charging the average variable interest rate of 5.67 per cent may be eligible to borrow up to $1 million.

However, if the couple applied for a loan with a lender offering a much lower rate of 4.25 per cent, they may be able to borrow an extra $145,000 towards their property purchase.

“Affordability has become a challenge because interest rates have gone up, and with the lowest rate home loan 1.42 per cent below the average, borrowers can effectively avoid almost half of the loss of purchasing power by choosing a lower rate loan,” Mr Mickenbecker said.

Philip Lowe, governor of the Reserve Bank of Australia (RBA), is expected to raise rates again in February. Picture: Mark Graham/Bloomberg via Getty Images

Importantly, now is a good time to hit up your employer for a pay rise.

A 5 per cent pay rise on $92,000 for a solo buyer can deliver $26,000 in new-found borrowing power, while a couple could add an extra $53,000.

“Budgeting for repayments is a balance between cash in and cash out, and it’s obvious that higher income means you can afford to borrow more,” he said.

“But it often only happens if you make it happen. Build your case and enhance your value as an employee, whether in your current job or your next role.”