Rate hikes to stress real estate market as bidder budgets shrink
The rise in RBA rates in May and the multiple hikes that are expected to follow will impact how much the bank is willing to let buyers borrow, applying a handbrake to the Australian property market.
As interest rates rise, people applying for a loan will find that the maximum amount they can borrow from the bank will decrease, as they will pay more interest to their bank.
Research by RateCity.com.au found that a single person, earning $100,000 before tax, with no dependents and no debt, is likely to see the maximum amount they can borrow from the bank drop by around $20,000. dollars following Tuesday’s 0.25% rise in the exchange rate.
By May next year, that person’s borrowing capacity (the maximum amount they can borrow from the bank) could drop by a total of $123,400 as the cash rate climbs to 2 .25%, if Westpac’s forecast comes true. This includes expected wage growth.
These calculations are estimates only. The amount a person can borrow depends on their personal circumstances and/or their lender.
Family Earning $150,000 Today: Maximum amount they can borrow from the bank
A family with two children, where one parent works full-time and the other part-time at half pay, with a combined annual income of $150,000 before taxes, will be able to borrow about $26,200 less as a result of the rise in the RBA in May. This assumes they have no other debts.
However, by May next year, if the cash rate rises to 2.25% as Westpac predicts, this family could borrow around $156,500 less than before the RBA hike in May.
RateCity.com.au research director Sally Tindall said: “The RBA’s rate hikes have the ability to apply significant handbrake to the Australian property market.”
“Lower interest rates have been the driver of soaring house prices over the past 18 months,” she said.
“Now that mortgage rates are on the rise, house prices could actually come back down to earth – or at least come close.
“Anyone planning to borrow at full capacity could see their budget shrink over the next few weeks due to last Tuesday’s cash rate hike. As a result, they will suddenly find that they could no longer bid as high at the next auction they enter.
“If rate hikes continue, as expected, people could see their home-buying budgets shrink further and further.”
the RBA estimated that a 2 percentage point increase in interest rates, which is now considered likely by many economists, could lower real house prices by around 15% over two years.
“Anyone considering taking out a new home loan in the coming months should carefully consider how much debt they have,” she said.
“Banks stress test your loan to see if you can still afford to repay if interest rates go up 3%. However, do your own calculations to make sure you are comfortable with this number as well.
“It’s also helpful to understand the impact a down property market could have on your finances.
“While a market decline probably isn’t a concern for most homeowners, anyone who can’t keep up with rising interest rates could find themselves in a tricky position,” she said.