A typical couple could lose up to $169,000 in borrowing capacity if the Reserve Bank of Australia hikes interest rates to 1.75 per cent in the future, according to new research.
Analysis from Canstar found borrowers would see their ability to buy property using finance significantly reduced, once interest rates started moving away from historically low levels.
According to Canstar, if the cash rate rose incrementally by 1.65 per cent in coming months, single homebuyers on a median income of $77,900 would have their borrowing capacity slashed by $71,000, allowing them to borrow around $388,000, while a couple with a combined income of $155,800 would see a fall of $169,000, to around $921,000.
Taking the official cash rate incrementally from 0.10 per cent to 1.75 per cent, would cause the average variable interest rate to increase from 3.04 per cent to 4.69 per cent.
Canstar’s finance expert, Steve Mickenbecker, said if the RBA decided to start tightening its monetary policy, it would likely continue for some time, which would put pressure on borrowers.
“When the Reserve Bank hits the button on cash rate increases, history shows that it doesn’t stop at one or two hikes, and usually results in at least a 1.5 per cent increase over 18 months or so,” Mr Mickenbecker said.
“Westpac is this time expecting a 1.65 per cent increase in just over two years.
“When the Reserve Bank moves the cash rate up you can be sure the banks will move home loan rates up too, meaning higher loan repayments. For borrowers entering the property market or trading up, this also means the capacity of incomes becomes stretched meaning they are forced to borrow less.”
Mr Mickenbecker said most home buyers had never been in an environment where interest rates were rising.
“Many borrowers only remember interest rates falling,” he said.
“This means a drop in borrowing power will come as quite a shock to buyers already facing the prospect of continuing runaway house prices.
“Also anticipating higher rates, the Australian Prudential Regulatory Authority in October announced an increase to the loan affordability buffer from 2.5 per cent to 3 per cent, further accentuating the impact of interest rate increases.”
Mr Mickenbecker believes while a rising interest rate environment will hurt borrowers, there are options to help purchase a property.
“Higher interest rates are bad news for buyers already stretched financially, and borrowers can learn from those who have been through the process to give themselves the best chance of success,” he said.
“Canstar’s survey revealed that home loan pre-approval approval is the number one tactic Australians believe contributes to property success. This keeps buyers realistic about their budget and ensures they target the right property, and also gives them the opportunity to talk to a lender about how they might increase borrowing power through moves like clearing other debt.
“This was followed by avoiding auctions and making an offer before auction or directly with the seller or real estate agent.
“Competition for properties is intense at the moment, so that any homework and research you can do to improve your confidence level is worth the investment.”