The $50,000 hip pocket hit making Melbourne home buyers rethink their next move

The average Melbourne home buyer can borrow $50,000 less than they could just two months ago, new data shows, as interest rate rises start to clip their spending power at auction.

With more rate rises expected, maximum loan amounts could be cut by more than $116,000 by next year, leaving many home buyers rethinking what they should borrow and buy as higher repayments loom.

A buyer on an average wage who would have had a borrowing capacity of $677,400 before interest rates rose, can now only borrow $626,500 after interest rates rose by 0.25 per cent in May and 0.5 per cent in June, RateCity modelling shows.

By May next year that amount could be reduced to just $561,200, if rates continue to rise in line with Westpac economists’ forecasts. The Reserve Bank is tipped to lift rates another 25 to 50 basis points on Tuesday.

A family with one partner working full-time and the other part-time could have borrowed $871,400 earlier this year but can now only access $805,900, with that amount expected to drop to $726,500 by next year.

The calculations assume a borrower has no other debt, meagre expenses and gets a wage increase by May next year.

Melbourne’s property market has already started falling and is expected to decline further.Credit: Simon Schluter

Rate City research director Sally Tindall expects house prices will continue to fall as buyers’ budgets are squeezed by lower loan amounts and the rising cost of living.

“We’re not going to see prices drop evenly across the country,” Tindall said. “Some people live in areas that are prone to needing to borrow at maximum capacity because of high [house] prices like Sydney and Melbourne and other hot spots in regional areas.”

Buyers in Melbourne have already started to step back from the market, after the COVID-19 induced boom. Home values are down 1.8 per cent over the past quarter, CoreLogic figures show, albeit still 3.1 per cent higher than a year ago. NAB on Thursday forecast Melbourne prices to fall 7.7 per cent this year and 14.1 per cent next.

While house prices are falling, St George chief economist Besa Deda said home buyers may have to compromise on the quality of home they buy or its location, as price drops will likely not be enough to offset higher borrowing costs they are facing.

Banks are lending less than they were two months ago because of interest rate rises.Credit: Paul Rovere

Borrowers with smaller savings buffers, like first home buyers, will be feeling the pinch as they apply for loans at higher interest rates than just a few months ago.

“They’ll need deeper pockets to pay their mortgage at least while we’re in this tightening cycle,” Deda said.

Some Melbourne buyers are already making tough decisions about their first, or next, move.

Dr Nick Voon and his partner Cameron Pinner have decided to cut their spend by $100,000 and borrow below the maximum to buy in Melbourne’s inner west.

Dr Nick Voon and his partner Cameron Pinner are looking to upgrade their unit to a house, and have decided to buy in a different price bracket as interest rates rise.Credit: Scott McNaughton

The couple in their early 30s intend to upgrade from a two-bedroom unit in Braybrook, to a three-bedroom house also in the inner west, as they are soon to welcome a baby via a surrogate.

“We had a number in mind before the interest rate rises,” Voon said. “But it has essentially slowed us down a bit.

“We are pre-approved, and we’re still looking, but we’ve shifted our price range, and we’re being a bit more cautious about what we can afford.”

Their mortgage broker and owner of Wheatley Finance, Andrew Wheatley, said interest rate rises are now a constant part of the conversation with buyers, but not all buyers would be affected by changes to maximum loan amounts.

“The reality is that what you can borrow today is less than what you could two or three months ago,” Wheatley said. “But, it’s only an issue if you want to borrow more than the banks will lend you.”

Those who would have been able to borrow $1 million were now looking at being able to borrow around $950,000, for example.

“If they only want to borrow $900,000 then that won’t affect them, but if they want $850,000 and can only borrow $800,000 that’s who’ll be affected,” he said.

Borrowers were concerned about rising interest rates, but also about whether they would be able to use the money they had been pre-approved for, before rates rose.

“They want to know if the banks will now reduce their loans? All of the lenders we deal with say they will honour what has already been approved,” he said.