Borrowing Capacity - The New Normal - November 2022
November 9, 2022 / Written by Rich Harvey
By Guest Blogger, Louisa Sanghera, Principal Broker,
Following seven interest rate rises in a row, home loans have not just returned to pre-covid levels – they’ve surpassed them.
And unfortunately, there may be further rate rises ahead.
So how can you best prepare for more rate rises that are yet to come – and what can you do about your borrowing power, if you want to buy in this market but your borrowing power has been squeezed?
The cash rate is currently sitting at 2.85% and it is likely to tip over 3% by Christmas, with economists and experts predicting a few increases in 2023 as well.
Many borrowers are already reeling from the massive increase to their monthly repayment levels, and the prospect of even more rate hikes is worrying.
For those who were considering investing in property, those plans may have been put on the backburner. With home loan rates 2.75% higher than they were at the beginning of the year, it may not feel like the ideal time to take on another loan.
However, if this sounds like you, here are a few things to consider:
- Rents are increasing - your home loan repayment is higher, but the rental income you’re getting is likely to be much higher, too, with the potential for rents to completely cover the mortgage repayment.
- Rate hikes will slow - and eventually, stop. Some economists are even predicting that interest rates may start to come down in the second half of 2023.
- Competition is decreasing - and with less competition in the market to drive prices up, you’ll be able to negotiate a lower price. In fact…
- Property prices are falling - interest rates may be higher, but the price you’ll pay for the property is likely to be lower. A home that was listed for $700,000 this time last year could sell for $600-650,000 today, or less, depending on the suburb and local market factors.
Many property experts say the best time to buy is when the market is in a depressed cycle, as there’s less competition and opportunities to negotiate abound.
If you’d like to buy an investment property, you’ll first want to work out your borrowing power – and just importantly, look for ways to increase it.
How to boost your borrowing power
The factors I’ve outlined in this article are the things you can’t change, as interest rates and the individual bank policies are out of your control.
So what are some of the levers you can actually pull to increase your borrowing power?
- Consolidate debts
Multiple debts such as credit cards, personal loans, car loans and store cards can chew through your disposable income and increase your risk profile. By consolidating them all into one debt, you can reduce your monthly repayment obligations, which will have the impact of boosting your borrowing power. You may even be able to consolidate your personal debts into your home loan – speak to your mortgage broker to discuss the pros and cons of doing this, considering your unique situation.
- Lower your credit card limit
Many people don’t realise that banks assess your credit card debts based on the limit, not on the outstanding balance. So if you have a $10,000 credit card limit but an outstanding balance of $500, the bank will assume you owe $10,000. Why? Because they know you have access to that amount of credit, and they need to ensure you can afford it. Reducing your credit limit by $5,000 can add upwards of $25k to your borrowing power (depending on the lender), so review and lower your credit limits before applying for a home loan.
- Check your credit score
Another one of the key things you can do to get your borrowing capacity up to a higher level is to ensure you have a good credit rating. The stronger your rating, the less “risk” you present to the lender. If you have a poor credit rating, they’ll perceive you as being at a higher risk of not making your repayments, which means they might reduce the amount they’re willing to lend you.
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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