On Tuesday the 7th of November 2023, the RBA decided to increase interest rates by 0.25%, which has taken the cash rate to 4.35%. This increase in interest rate has had an effect on all borrower’s, capacity to borrow. As interest rates climb, your ability to borrow is reduced- so what are some of the things you can do to limit the damage to your borrowing capacity:
- Choose your lender carefully: Most lenders will have you pre-approved for a certain loan amount at a certain purchase price. If interest rates increase from the time of pre-approval to the time that you purchase, your borrowing power will be reduced. There are some lenders in the market that will hold your ‘Assessment rate’ at the time you are pre-approved for the duration of your pre-approval period. This gives you comfort and confidence to go and purchase up to your limit without having to worry about how much borrowing power you are losing with each rate rise.
- Understand your lender’s policy: Do you receive bonus income? Did you receive shift allowances as part of your job? Are you an Emergency Services worker? Every lender has a different level of risk within their appetite. Some lenders will look upon certain types of income, more favourably than others. Knowing which lender suits your circumstances will potentially increase your borrowing capacity.
- Understand what is most important to you: Most borrowers will tell you the most important thing to them is their interest rate. What if Lender A could lend you $900,000 at a rate of 5.84% and Lender B could lend you $1,000,000 at a rate of 5.99%? Stretching to a higher borrowing capacity, whilst at a higher rate, may be the difference between buying your dream home and compromising on the type of place you will be for the next 5-10 years. Whilst your rate is important in terms of your repayment, if a lender can lend you more, this may get you to your forever home. This will depend on your personal circumstances and keep in mind you are not married to your lender for the duration of your 30 year loan term. If circumstances allow, you can always look to refinance your loan to a lender with a lower rate in the future.
If the above seems too daunting, I recommend that you speak to an experienced mortgage broker who can help navigate through the tricky lending landscape.
Written by Lionel Singh
Senior Mortgage Broker and Team Leader.
