Rising interest rates could see average home buyers’ borrowing capacity fall by more than $150,000, according to new research.
Research from RateCity.com.au found that an average couple earning $150,000 per year combined, with two kids, could see their borrowing capacity shrink by $156,500 should the Reserve Bank of Australia (RBA) increase the cash rate to 2.25 per cent.
The RBA is expected to continue to increase the official cash rate until it reaches a “neutral level”, with Westpac forecasting rates to get as high as 2.25 per cent by May 2023.
According to RateCity.com.au, a family with two kids, where one parent works full-time and the other part time at half the wage, on a combined annual income of $150,000 before tax, will be able to borrow an estimated $26,200 less as a result of the May RBA hike that saw the official cash rate increase (OCR) by 0.25 per cent.
For a single person, earning $100,000 before tax with no dependents and no debts, their borrowing capacity from the bank is likely to drop by around $20,000 on the back of last Tuesday’s 0.25 per cent cash rate hike and by $123,400 should the RBA increase the OCR to 2.25 per cent.
RateCity.com.au research director, Sally Tindall said further hikes from the RBA will slow down people’s ability to borrow.
“Anyone who was planning to borrow at capacity could see their budget shrink in the next few weeks on the back of last Tuesday’s cash rate hike,” Ms Tindall said.
“As a result, they’ll suddenly find they could no longer bid as high at the next auction they go to.
“If the rate hikes keep coming, as they’re forecast to do, people could find their home buying budgets shrink further and further.”
Ms Tindall said reduced borrowing capacity could limit further property price growth.
“The RBA rate hikes have the capacity to apply a significant handbrake to Australia’s property market,” she said.
“Falling interest rates have been a driving force behind soaring property prices over the last 18 months,” she said.
“Now home loan rates are on the rise, property prices could actually come back down to Earth – or, at least, closer to it.”
With the RBA expected to continue to increase the cash rate, Ms Tindall said borrowers need to be prepared for higher mortgage costs.
“Anyone planning to take out a new home loan in the coming months needs to carefully consider how much debt they take on,” she said.
“The banks stress test your loan to see if you can still afford your repayments if interest rates rise by 3 per cent. However, do your own maths to make sure you’re comfortable with that figure too.
“It’s also worth understanding what impact a falling property market could have on your finances.
“While a dip in the market is unlikely to be a concern for most homeowners, anyone that can’t keep up with rising interest rates could find themselves in a tricky position.”