Borrowing Capacity And The End Of Intrerest Rate Rises: What Now? - May 2023
May 25, 2023 / Written by Rich Harvey
By Guest Blogger, Louisa Sanghera, Principal Broker,
With the Reserve Bank raising interest rates 11 times over the past year, it appears that interest rates may have arrived near their peak. They were hiked in an effort to combat high inflation, which economists predict is (slowly) on its way back down.
But where does all the interest rate activity of the last 12 months leave borrowers?
If you’re looking to buy a property to either grow your portfolio or upgrade your home and you need a loan, is it still possible to get a decent interest rate on your next mortgage?
It’s a very complex property market and mortgage environment at the moment, but I can offer a few pieces of advice to help you navigate forward as best as possible:
1. Every lender charges a different interest rate
Don’t make the mistake of thinking that the lender you’re with at the moment represents the whole market. Odds are, there are other banks out there offering a cheaper rate. In fact, the difference between the lowest interest rate on our panel – for borrowers with a good credit rating and at least 40% equity in their home – is around 5.24%. However, the most expensive loan has an interest rate of 6.44%. This is why it’s so important to shop around!
2. It’s about MORE than the interest rate
When you factor in extra costs like application fees, ongoing fees, valuations and LMI – all of which will be different, depending on which lender you apply with – you can see that the difference between the cheapest and most expensive loan on the market can be massive. As finance brokers, we factor in all of these different fees and charges when we look at different loan options for you, and we make recommendations based on the most affordable and suitable home loan for you.
3. Your borrowing capacity has gotten worse
With each rate rise, your borrowing capacity got lower. For instance, if you are a single borrower earning $100,000 and you want a principal and interest loan with an interest rate of 4.99%, your borrowing power is $531,000. One interest rate increase of 0.25% (bumping the rate up to 5.24%) sees your borrowing power drop to $518,000. Back when interest rates were 2%, this applicant could have borrowed almost $700,000! As you can see, on average, your borrowing power has taken a hit to the tune of around 30%.
4. There is a HUGE amount of competition in the mortgage market
Your borrowing power may be down, but that doesn’t mean all hope is lost. Banks and lenders want your business and they’re offering all sorts of incentives to attract new business, such as cashbacks of up to $4,000 or lower interest rates for new borrowers. Shopping around can make a massive difference as to how much you can borrow.
5. You can take steps to increase your borrowing power
Also, even though your borrowing power has taken a hit, it may be possible to boost it back up by paying off or consolidating some of your personal debts. Many people don’t realise that credit card limits can impact their borrowing power. For example, a $20,000 credit card limit could slash six figures off the amount you can borrow! Again, if you work with an experienced mortgage broker to look at your overall financial situation, we can make recommendations to help you put your very best foot forward on your home loan application.
Finally, I have many clients asking me whether they should fix their rate or get a variable loan. The answer to this truly depends on your unique circumstances, although I can say that far fewer people are taking out fixed rates these days, as there is so much speculation that rates will fall again in the next 6-12 months.
To see what your options are, contact a Mortgage Broker to see what your options are.
Contact us today on 1300 855 022 or visit www.zippyfinancial.com.au
Louisa Sanghera - Director and Principal Award-Winning mortgage broker at Zippy Financial
Louisa created Zippy Financial after a 25-year career in banking, with the goal of using her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients grow their wealth through smart property financing. Whether you are looking to buy your first home, re-finance or build your property investment portfolio, Louisa and her team of experienced brokers can help guide you through the challenging maze of finding & securing exactly the right loan for you.
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