For the sixth consecutive month, the Reserve Bank of Australia (RBA) has raised the official cash rate, with most lenders increasing interest rates soon after. For some potential home buyers, the increase in interest rates has come as a shock, forcing them to re-evaluate existing pre-approvals and borrowing capacity. Here’s more on how rising interest rates impact borrowing capacity and pre-approvals, and what to do about it.
A reliable pre-approval
Across Australia, many prospective home buyers are discovering how much of their home buying budget has been slashed, as interest rate rises have reduced the amount many can now borrow.
This comes after the Reserve Bank of Australia lifted the official cash rate by a further 25 basis points to 2.60 per cent on 4 October, 2022, the sixth time this year that rates have gone up, prompting all of the major banks and a number of other lenders to push up their interest rates across both variable and fixed interest rate loans.
Home buyers with existing finance pre-approvals are being urged to re-assess their financial situation in light of the impact rising interest rates will have on their borrowing capacity. While it remains prudent to secure a pre-approval prior to entering a sale and purchase agreement, existing pre-approvals may now be out-of-date and will require a re-assessment to confirm reliability and correct borrowing level.
Buying at auction or unconditionally
Home buyers looking to bid at auction or signing an unconditional purchase agreement are strongly advised to check with their lender or mortgage broker beforehand, to ensure that existing finance pre-approvals are still valid and that borrowing capacity is not impacted by rising interest rates.
For buyers already at their maximum pre-approved amount, there is considerable risk that borrowing capacity will have reduced in the current interest rate environment. However, it’s important to note, that borrowing capacity can vary from lender to lender depending on their internal criteria, which is why it’s so important to talk to a mortgage broker.
Confirming borrowing capacity
Understanding borrowing capacity is becoming increasingly important in a rising interest rate market. Regardless of whether it’s a first home or a next home, greater borrowing capacity means more options when it comes to buying a home or investment property.
Prospective home buyers who have been thrown into disarray with rising interest rates and reduced borrowing capacity are encouraged to contact their mortgage broker to revisit their financial options, as there may still be lending solutions available with a different lender.
Furthermore, there are a few things home buyers can do to strengthen their own financial position before applying for a home loan or a new pre-approval. Factors such as income, living expenses and existing debt are considered by lenders when determining borrowing capacity. Reducing high interest debt, increasing income, or cutting back on everyday expenses could improve borrowing capacity.
Finally, reviewing your current financial position could provide insight into how to move forward if your existing pre-approval is impacted by a change in interest rates. Contact a Mortgage Express broker today to book a financial review.
While all care has been taken in the preparation of this publication, no warranty is given as to the accuracy of the information and no responsibility is taken by Finservice Pty Ltd (Mortgage Express) for any errors or omissions. This publication does not constitute personalised financial advice. It may not be relevant to individual circumstances. Nothing in this publication is, or should be taken as, an offer, invitation, or recommendation to buy, sell, or retain any investment in or make any deposit with any person. You should seek professional advice before taking any action in relation to the matters dealt within this publication. A Disclosure Statement is available on request and free of charge.
Finservice Pty Ltd (Mortgage Express) is authorised as a corporate credit representative (Corporate Credit Representative Number 397386) to engage in credit activities on behalf of BLSSA Pty Ltd (Australian Credit Licence number 391237) ACN 123 600 000 | Full member of MFAA | Member of Australian Financial Complaints Authority (AFCA) | Member of Choice Aggregation Services.
