LA Today Wire
First-home buyers have potentially suffered a five-figure hit to their borrowing power thanks to four interest rate rises since February, pushing the homeownership dream even further out of reach. The Reserve Bank of Australia (RBA) delivered yet another blow to aspiring buyers budgets today, lifting the official cash rate by another 25 basis points to 4.6 per cent – the highest since November 2011. “The three increases in the cash rate target since the beginning of the year have tightened financial conditions and the economy appears to be slowing,” the RBA Board said in a statement.
“But inflation is still too high and the Board judged that, in light of recent developments, a further tightening in financial conditions is warranted to support a return of inflation to target in a reasonable period.” Australia now has the second highest cash rate in the world – behind Iceland. Eventus Financial mortgage broker and founder Alex Veljancevski said the cumulative effect of the four rate hikes could be substantial, even for buyers whose income, deposit and expenses have stayed the same. “Even if their income, expenses and deposit haven’t changed, the maximum amount a lender is prepared to give them may have fallen considerably,” Mr Veljancevski said, adding that while much of the public attention focused on higher repayments for existing mortgage holders, aspiring buyers may be facing a significant hit through reduced borrowing capacity.
Alex Veljancevski Eventus Financial Mr Veljancevski said that RBA research found that a 50-basis-point increase in the rate used to assess mortgage serviceability could reduce maximum loan sizes by up to 5 per cent. Combined, the four interest rate increases since February have pushed the cash rate up by one percentage point. Mr Veljancevski said that during the 2022 rate-rising cycle, the central bank also estimated that a 225-basis-point increase in the cash rate, fully passed through to mortgage rates, reduced maximum loan sizes by around 20 per cent.
He said that, as a broad guide, a 1 percentage point increase in mortgage rates could cut maximum borrowing capacity by roughly 10 per cent, although the exact result would vary depending on income, debts, expenses and lender policy. That could mean a first-home buyer who was able to borrow $800,000 at the start of the year may now only qualify for around $720,000, he said. “That’s where the cumulative impact becomes much more significant,” Mr Veljancevski said.
“We’re no longer talking about one 25-basis-point increase. Four rate rises can add up to a substantial reduction in how much a first home buyer is able to borrow.” What the new interest rate will cost you. Realestate.com.au One reason for the drop is APRA’s mortgage serviceability buffer, which generally requires lenders to assess new borrowers at an interest rate at least 3 percentage points above the actual loan rate.
As mortgage rates rise, the assessment rate generally rises too, reducing the size of the loan a borrower may be able to service, even if nothing else in their financial position has changed. According to Canstar, the average Aussie loan size is $731,000 meaning buyers could potentially see their borrowing power drained to the tune of $73,000 in just seven months. But it gets worse.
Mr Veljancevski said first-home buyers could also face more competition at the affordable end of the market if investors started chasing lower-priced properties. If changes to negative gearing reduce the appeal of established investment properties, some investors may increasingly turn to cheaper homes, apartments and townhouses where the numbers still work. That could place first-home buyers under pressure from both sides: lower borrowing power and more competition for entry-level stock.
“First home buyers could potentially be squeezed from both directions,” Mr Veljancevski said. “Higher interest rates and servicing requirements may reduce how much they can borrow, while investors with tighter budgets may increasingly compete for the same lower-priced homes, apartments and townhouses. “So a first home buyer with reduced borrowing capacity may not just have a smaller budget to work with.
“They may also have a smaller pool of suitable properties available within that budget.” First-home buyer budgets have taken a hit Federal Treasurer Jim Chalmers announced sweeping reforms to property tax incentives during the May Budget. Under the reforms, new investors will only be able to negatively gear newly built properties from July next year while current capital gains tax discounts for investors selling properties will be replaced by an indexation system tied to inflation. Investors who bought before Budget night were not affected by the negative gearing reforms due to grandfathering provisions.
But rentvestors, many who are younger and unable to afford to buy where they live and work so purchase elsewhere to get a foot on the property ladder, will not be afforded the same incentives as those who came before them. The reforms were sold to the nation as the “most important and ambitious” reforms in decades, with the aim of making the tax system “fairer and stronger for workers, businesses, first home buyers and future generations”. MORE: 825,000 Aussies aim to clear home loans in five years ‘Most terrifying’: Aus’s creepiest train stations revealed ‘Can cost thousands’: Tradie warns of hidden threat Treasurer of Australia Jim Chalmers speaks to the media at Parliament House, Canberra But since the Budget, first-home buyer activity has plunged to a four-year low.
And according to the latest data from Finder’s Consumer Sentiment Tracker (CST), 36 per cent of 18 to 39 year olds have all but given up, saying they don’t think they will ever own their home, That’s compared to just 13 per cent who said the same thing back in first half of 2019. “For some first home buyers, losing borrowing capacity means changing the property search altogether,” Mr Veljancevski said. “They may have to consider a townhouse instead of a house, a unit instead of a townhouse or a different part of the city.” He also warned buyers with pre-approval not to assume their approved amount was unchanged.
“A buyer who was pre-approved earlier this year shouldn’t assume that figure still applies after four rate rises,” he said. “That becomes particularly important at auction, where the difference between the borrowing capacity you thought you had and what the lender will approve today could be tens of thousands of dollars.” Realestate.com.au senior economist Eleanor Creagh said the RBA’s cash rate increase would put further presssure on households and the housing market. “Another rate rise reinforces the downturn already underway,” she said.
“Higher mortgage rates further reduce borrowing capacities and buyer budgets, adding to the downward pressure on home prices and sales activity. “However, this remains an orderly adjustment rather than a distressed housing correction.” Realestate.com.au senior economist Eleanor Creagh But the pain may not be over anytime soon, with the Finder RBA Cash Rate Survey of 41 experts and economists tipping at least one more rate hike by the end of the year. Finder home loans expert Richard Whitten said the fourth hike would push some already stretched borrowers to breaking point, adding that it wasn’t a huge surprise that more than a third of young Australians had given up on ever owning a home.
“Between high prices, high rates and a tough rental market, the goalposts keep moving,” he said.
Source: realestate.com.au
