The cost of the home loan is affected by rising interest rates, not just in terms of monthly payments. The interest rates also affect the borrowing capacity of those looking to get a home loan. Due to buffers for serviceability, the effect is greater than you may think.
When you apply for a mortgage, lenders will add a serviceability buffer to the rate to determine if you can continue to pay your repayments even if rates rise. The Australian Prudential Regulation Authority (APRA), which provides guidelines to banks for the buffer rate of 2.5%, stated in October that it expected lenders would increase the minimum serviceability cushion from 2.5% up to 3%.
If you apply for a home loan at a 2.5% rate of interest, the bank will determine whether you are approved for the loan by calculating your repayments as though the rate was 5.5%. Previously, it would only have been 5%. We’ll see how this affects what people can afford to borrow.
How much will my borrowing power fall?
Your borrowing power is the amount that a lender will allow you to borrow for a mortgage. This is also called your borrowing capability. This depends on a number of variables, including income, assets and liabilities, debts, and credit history. It also includes the deposit amount as well as the value of the property.
Banks pass on the increase in cash rate to lenders when the Reserve Bank increases the speed. This increases the interest rate on home loans with variable rates. It increases the serviceability cushion for those who are applying for a mortgage. We have calculated how a 0.5 percent increase in your borrowing power will affect you:
Borrowing power with serviceability buffer at 2.5% and 3.0%
Calculations are based solely on income. Use our borrowing power calculator to enter your data.
The table below shows that if the buffer rates increased from 2.5% to 3.0%, a $100,000 earner would see their borrowing power reduced by $24,100. A person earning $150,000 would see a drop of $35,500, while someone making $200,000 would have a decrease of $47,000.
What Does This Mean to You?
- All new borrowers are eligible for the increased interest rate buffer.
- Investors will be affected more by a higher buffer for serviceability than owners-occupants. Investors are more likely to borrow at higher leverage levels and have existing debt.
- First-time buyers are often unable to pay a large down payment. This means that increases in serviceability will have a greater impact on them, as they will be forced to borrow more money to buy a house.
- Knowing your borrowing capacity will help you to determine the monthly payments you can make and what properties you can afford. This way, you won’t waste time searching for houses that are out of your budget.
How to Boost Your Home Loan Borrowing Capacity
- Here are ten useful suggestions to increase your ability to get a mortgage.
- Reduce your credit card limits.
- Close unsecured debts such as personal loans, auto loans, and HECS debt.
- Reduce your monthly living expenses for three to six months before you apply for a home loan.
- Ask for a longer mortgage term.
- Consider a mortgage with a fixed rate because it can be assessed for a lower rate.
- Change to a repayment plan that only charges interest.
- You should find a lender who will lend to you based on your income and employment.
- Share your expenses with your partner.
- Consolidate your unsecured debts to your existing mortgage in order to increase the borrowing power of your home loan.
- Keep your report as up-to-date as possible.
We can help you find the best deal.
Mortgage brokers can assist you in getting your home loan approved. They do this by calculating your borrowing capability. Our brokers can help you refinance your home loan to a lender with lower interest rates. They will compare lenders and find the best deal.