- Canstar figures showed borrowing power could be slashed by some $300K.
- Reducing your credit card limits is one of the top tips.
- More interest rate rises are tipped to happen in the near future.
Experts are predicting Australians will have to endure another interest rate rise as the Reserve Bank of Australia (RBA) meets this February.
Most are expecting the next rate rise to be to the tune of 0.25 per cent or 25 basis points, especially against the backdrop of recent inflation figures.
As ever, the million-dollar question is: can I afford a house?
According to Canstar’s latest figures, the answer is yes, if you revise that to the $980,000 question.
Rate rises slash borrowing power
Analysis by financial comparison site, Canstar, has found buying a home will be a nightmare as Australians’ borrowing power has collapsed since April last year.
A single-income borrower might have been able to get $568,000 from the bank in April last year but will only be able to get $435,000 today. If interest rates rise three more times this year that borrower will barely be able to afford a home worth $400,000.
Dual-income families likewise saw the ability to borrow brought down, what would have been a $1.3 million dream home in April last year is now modest million.
| Borrowing Power Estimates Based on Cash Rate Forecasts | |||||
| Apr-22 | Jan-23 | +0.25% | +0.25% | +0.25% | |
| Cash Rate | 0.10% | 3.10% | 3.35% | 3.60% | 3.85% |
| Average Variable Interest Rate | 2.98% | 5.67% | 5.92% | 6.17% | 6.42% |
| Single: Average gross income of $92,000 | |||||
| Highest Affordable Loan | $568,000 | $435,000 | $425,000 | $416,000 | $407,000 |
| Property purchase price (20% deposit) | $710,000 | $543,750 | $531,250 | $520,000 | $508,750 |
| Monthly Repayment | $2,389 | $2,516 | $2,526 | $2,540 | $2,551 |
| Couple: Average gross income of $184,000 | |||||
| Highest Affordable Loan | $1,309,000 | $1,003,000 | $980,000 | $959,000 | $938,000 |
| Property purchase price (20% deposit) | $1,636,250 | $1,253,750 | $1,225,000 | $1,198,750 | $1,172,500 |
| Monthly Repayment | $5,505 | $5,802 | $5,825 | $5,855 | $5,880 |
| Source: Canstar – 23/01/2023. Interest rate based on average overall variable rate on Canstar’s database for loans available for 80% LVR, a loan amount of $500,000 and a 30-year loan term. Borrowing power calculations assume a loan term of 30 years, annual expenses of
$16,500 for a single and $20,580 for a couple, 80 per cent of income available to service the loan, and a three per cent interest rate buffer. All input and output figures of the calculator are rounded to the nearest $100. Average annual income based on the adult full-time ordinary time earnings from the ABS Average Weekly Earnings (May 2022). |
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Experts are tipping the cash rate to hit a peak around early to mid this year, with ANZ and Westpac predicting 3.85 per cent by May, and other experts and members of industry, 4 per cent.
Canstar’s finance expert, Steve Mickenbecker said, “For years first home buyers have been struggling to raise a sufficient deposit to buy into the housing market. Just when softening property prices have somewhat eased this burden, higher interest rates and repayments have now become the major impediment.”
“First home buyers are the one group that will welcome a house price fall, but with each further 0.25 percent interest rate increase, the borrowing capacity of an average income earner falls by around $10,000. With another couple of rate increases expected before a pause, it is two steps forward and one back.
“Higher December quarter inflation will drive the Reserve bank to a February decision to increase the cash rate by another 0.25 percent. Concern about an emerging recession overseas will eventually motivate a pause, but for now, the domestic data is the dominant factor.
“Even if the average income earning home buyer has put aside the normal 20 percent deposit and can cover stamp duty and other purchase costs, loan repayment affordability at present puts a $543,000 cap on the property purchase price. This is almost $70,000 below CoreLogic’s estimated capital city median unit price of $612,308. A rate rise of 0.25 percentage points in February blows the gap out to $81,000.
“To keep pace with diminishing borrowing power, hopeful homebuyers will need to go back to the drawing board to reappraise their property expectations. But there are also steps that homebuyers can take that will go some way to narrowing the gap.”
Expert’s top three tips to boost borrowing power
- Clear unused credit card limits
- Look out for a lower rate loan
- Ask for a pay rise
Reduce your credit card limits
Canstar’s Mickenbecker said, “An unused credit card limit may sound like a safety net, but it can actually work the other way and reduce borrowing power.”
What’s a credit limit? Credit card limits are the maximum amount of money you can charge on a card.
When applying for a home loan, lenders base your borrowing power on your income and expenses and will want to know if you will be able to still comfortably afford repayments if you maxed out the limits on your credit card.
| Impact of Credit Card Limits on Borrowing Power | |||||
| Credit Card Limit* | $0 | $2,000 | $5,000 | $10,000 | $20,000 |
| Single Buyer | |||||
| Borrowing Power | $435,000 | $425,000 | $410,000 | $386,000 | $337,000 |
| Diff to no credit card | – | -$10,000 | -$25,000 | -$49,000 | -$98,000 |
| Couple Buyer | |||||
| Borrowing Power | $1,003,000 | $993,000 | $978,000 | $954,000 | $905,000 |
| Diff to no credit card | – | -$10,000 | -$25,000 | -$49,000 | -$98,000 |
| Source: Canstar – 25/01/2023. Borrowing power calculations assume the average variable rate of 5.67 per cent , a loan term of 30 years, average gross annual income of $92,000 (doubled for a couple), annual expenses of $16,500 for a single or $20,580 for a couple, 80 per cent of income available to service the loan, and a three per cent interest rate buffer. All input and output figures of the calculator are rounded to the nearest $100. *Credit limit refers to a shared limit for the couple scenario. | |||||
A high unused credit card limit could have a significant impact on the amount you could borrow. Canstar’s research shows a solo buyer on an average gross income of $92,000 with a credit card limit of $10,000 could bump up their borrowing power by $49,000 if they got rid of their card or by $39,000 if they lowered their credit limit to $2,000.
Mickenbecker added, “Repayment of the potentially fully drawn credit card over three years is usually factored into the lender’s affordability assessment, so that you may be better off scrapping an unused card to get into your home.”
Shop around for lower rates
It’s some pretty simple advice that needs little explaining. Canstart ran the numbers on what the impact might look like:
| Impact of Lower Interest Rate on Borrowing Power | |||
| Average Variable Rate | Lower Rate | Difference | |
| Interest Rate | 5.67% | 4.25% | -1.42% |
| Single Buyer | |||
| Gross Annual Income | $92,000 | – | |
| Borrowing Power | $435,000 | $498,000 | $63,000 |
| Couple Buyer | |||
| Gross Annual Income | $184,000 | – | |
| Borrowing Power | $1,003,000 | $1,148,000 | $145,000 |
| Source: Canstar – 25/01/2023. Average variable rate based on owner occupier variable loans on Canstar’s database, available for a
$500,000 loan, 80 per cent LVR and principal & interest repayments; excluding introductory and first home buyer only loans. Borrowing power calculations assume a loan term of 30 years, annual expenses of $16,500 for a single or $20,580 for a couple, 80 per cent of income available to service the loan, and a 3 per cent interest rate buffer. All input and output figures of the calculator are rounded to the nearest $100. Average annual income based on the adult full-time ordinary time earnings from the ABS Average Weekly Earnings (May 2022) (doubled for a couple). |
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“Affordability has become a challenge because interest rates have gone up, and with the lowest rate home loan 1.42 percent below the average, borrowers can effectively avoid almost half of the loss of purchasing power by choosing a lower rate loan,” said Mickenbecker.
Ask for a pay rise
It may sound a tad facetious, even downright flippant, but every little helps. A pay rise on the average gross annual income of $92,000 of five per cent or close to $5,000 for a solo buyer can deliver $26,000 in newfound borrowing power. For a couple who are both able to secure a five per cent pay rise, an extra $9,200 could add an extra $53,000 to borrowing power.
| Impact of Higher Income on Borrowing Power | |||||
| Average Income | One Person Receives a 5% Pay Rise |
Difference |
Both People Receive a 5% Pay Rise |
Difference |
|
| Single Buyer | |||||
| Gross Annual Income | $92,000 | $96,600 | $4,600 | ||
| Borrowing Power | $435,000 | $461,000 | $26,000 | ||
| Couple Buyer | |||||
| Gross Annual Income | $184,000 | $188,600 | $4,600 | $193,200 | $9,200 |
| Borrowing Power | $1,003,000 | $1,029,000 | $26,000 | $1,056,000 | $53,000 |
| Source: Canstar – 23/01/2023. Borrowing power calculations assume the average variable rate of 5.67%, a loan term of 30 years, annual expenses of $16,500 for a single or $20,580 for a couple, 80 per cent of income available to service the loan, and a three per cent interest rate buffer. All input and output figures of the calculator are rounded to the nearest $100. Average annual income based on the adult full-time ordinary time earnings from the ABS Average Weekly Earnings (May 2022) (doubled for a couple). | |||||
“Budgeting for repayments is a balance between cash in and cash out, and it’s obvious that higher income means you can afford to borrow more. But it often only happens if you make it happen. Build your case and enhance your value as an employee, whether in your current job or your next role,” said Mickenbecker.
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Disclaimer: This article contains general information and should at no time be considered financial advice to the reader. The reader should always verify their situation with their financial advisors before taking any further steps.
