Rates slash borrowing capacity by $250k

Falling property prices have not made housing more affordable after nine consecutive interest rate rises slashed the amount buyers can borrow by thousands.

Taylor and Ashleigh Bredlin, with Harvey, 8 months, recently sold their North Kellyville home at auction. Picture: Britta Campion/The Australian

Falling property prices have not made housing more affordable after nine consecutive interest rate rises slashed the amount buyers can borrow by thousands.

Analysis by The Australian has shown that those looking to buy with monthly repayments of $4038 – the repayments on the average owner-occupier mortgage – have had $244,271 slashed off of their borrowing capacity in less than a year.

Sydney-based mortgage broker Terri Ulwin has been telling clients each 25 basis point increase in rates is equivalent to $25,000 less you can borrow. This is not only linked to the 3.25 per cent increase to the official cash rate by the Reserve Bank since May to combat inflation, but the 3 per cent serviceability buffer the banks use to assess a borrower‘s ability to meet repayments.

“First-home buyers haven’t caught a break for close to three years now,” Ms Ulwin said.

House prices have corrected 4.5 per cent nationally from the peak of the market, according to housing researcher PropTrack.

Ms Ulwin said: “Three or four months ago, we were hearing a lot more people saying ‘property prices are going to drop, so we‘ll just sit back and wait’, but it’s not dropping at the level their borrowing capacity is decreasing.

“So, they are being priced out of areas or the properties they could have potentially purchased previously.”

In real terms, the $244,000 cut to borrower‘s spending would cause a borrower in Brisbane considering a home in the northside suburb of Eatons Hill ($955,000 median) to look 12km further out of the city to Petrie ($711,000), or a hopeful buyer into the inner-city Sydney suburb of Summer Hill ($2.185m median) to swap for Lilyfield ($1.940m).

For those who purchased at the top of the boom, falling prices combined with lower borrowing capacity have created a dangerous cocktail, with selling locking in their losses.

PropTrack suggests property prices will slide 10 per cent this year. Director of economic research Cameron Kusher said the lack of rate certainty – both in how much buyers will pay and can purchase with – is causing many to sit on their hands.

“Once interest rates stop moving every single month, even though borrowing capacity is going to be significantly reduced, there‘s just a bit more certainty there,” Mr Kusher said.

Cameron Kusher.

“People will be prepared to buy and sell property more than they are at the moment.”

In North Kellyville, northwest of Sydney, the Bredlins have started to pack after selling their home at auction this month above reserve for $1.8m.

Taylor and Ashleigh, aged 31 and 29, have lined up a rental for the next few months and hope to buy later this year.

“My wife has been off work since May last year … so our borrowing power has definitely dropped a lot because of that and then also the interest rate rises,” said Mr Bredlin, a local real estate agent with Ray White Quakers Hill.

“It’s definitely not as easy as what it would have been eight, nine months ago.”

To shore up their deposit, they are saving and have recently subdivided the block of their investment home and are in the process of selling both properties.

“If the right opportunity comes up tomorrow, we jump on it, but we’re also not falling over ourselves to compete with other people at the moment,” Mr Bredlin said.

Ms Ulwin said that in a slowing and falling market such as today’s, it is best to have a buyer lined up for your home before you commit to another property to know exactly how much money you have to work with.

“As long as you‘re selling and buying in the same market, you’re not going to lose out,” she said.

“You might get a little bit less for your property, but you might purchase for a little bit less on the property that you’re buying.”